Munich Personal RePEc Archive

On the Special Role of Deposits for Long-Term Lending

Perazzi, Elena (2019): On the Special Role of Deposits for Long-Term Lending.

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In contrast to narrow banking proposals, I argue that deposits are a special form of financing, that makes banks more suitable to extend long-term loans when confronted with the risks of monetary policy. The synergy between deposit-taking and long-term lending arises because profits on deposits are highest after a contractionary monetary policy shock, precisely when the banks' balance sheets deteriorate due to maturity mismatch, and equity-constrained banks deleverage by cutting their lending. I quantify the impact of this mechanism in a dynamic bank model embedded in general equilibrium, and find that deposits mitigate the contraction of new lending at high interest rates by a factor between 25% and 50%.

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