Payment Risk and Bank Lending: Reassessing the Bundling of Payment Services and Credit Provision

Bundling credit provision and payment services creates liquidity mismatch for banks. While investing in illiquid loans, banks support payment activities by allowing depositors to freely transfer funds into and out of their accounts. Using payment data from Fedwire, we show that banks face sizeable liquidity risk due to depositors' payments. Payment liquidity risk is a form of funding risk inherent in the monetary role of deposits, yet it compromises the role of banks as lenders. An increase in payment risk is associated with a significant decline in lending. The effect is stronger for undercapitalized banks and when reserves are scarce.

Keywords: Payment, deposits, bank lending, reserves, funding stability, liquidity mismatch JEL classification: E42, E43, E44, E51, E52, G21, G28

JEL Classification: E42, E43, E44, E51, E52, G21, G28

Suggested Citation: Suggested Citation

Li, Ye and Li, Yi, Payment Risk and Bank Lending: Reassessing the Bundling of Payment Services and Credit Provision (November 07, 2021). Fisher College of Business Working Paper No. 2021-03-017, Charles A. Dice Center Working Paper No. 2021-17, Available at SSRN: https://ssrn.com/abstract=3959110 or http://dx.doi.org/10.2139/ssrn.3959110