Payment Risk and Bank Lending

Fisher College of Business Working Paper No. 2021-03-017

Charles A. Dice Center Working Paper No. 2021-17

60 Pages Posted: 8 Nov 2021 Last revised: 5 Jan 2022

See all articles by Ye Li

Ye Li

Ohio State University (OSU)

Yi Li

Board of Governors of the Federal Reserve System

Date Written: December 18, 2021

Abstract

Deposits finance bank lending and serve as means of payment for bank customers. Under uncertain payment flows, deposits are debts with random maturities. Payment outflows drain reserves, and the risk is most prominent when funding markets are under stress and banks are unable to smooth out payment shocks. We provide the first evidence on the negative impact of payment risk on bank lending, bridging the literatures on payment systems and credit supply. An interquartile increase in payment risk is associated with a decline in loan growth rate that is 10% of standard deviation. Our findings are stronger in times of funding stress and robust across banks of different sizes and loans of long and short maturities. Banks with higher payment risk raise deposit rates to expand customer base and internalize payment flows. Finally, we show that payment risk dampens the bank lending channel of monetary policy transmission.

Keywords: Credit supply, deposits, payment, inside money, monetary policy transmission

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

Suggested Citation

Li, Ye and Li, Yi, Payment Risk and Bank Lending (December 18, 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

Ye Li (Contact Author)

Ohio State University (OSU) ( email )

Blankenship Hall-2010
901 Woody Hayes Drive
Columbus, OH OH 43210
United States

Yi Li

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-721-4576 (Phone)

HOME PAGE: http://sites.google.com/view/yili/

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