Unintended Consequences of Unemployment Insurance Benefits: The Role of Banks
68 Pages Posted: 14 May 2021 Last revised: 30 Jun 2021
Date Written: April 1, 2021
We use disaggregated U.S. data and a border discontinuity design to show that more generous unemployment insurance (UI) policies lower bank deposits. We test several channels that could explain this decline and find evidence consistent with households lowering their precautionary savings. Since deposits are the largest and most stable source of funding for banks, the decrease in deposits affects bank lending. Banks that raise deposits in states with generous UI policies squeeze their small business lending. Furthermore, counties that are served by these banks experience a higher unemployment rate and lower wage growth.
JEL Classification: D14, G21, J20, J65
Suggested Citation: Suggested Citation