On the Special Role of Deposits for Long-Term Lending

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

Abstract

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%.

• Item Type: MPRA Paper
• Language: English
• Keywords: Deposits, Banks, Long-Term Lending, Narrow Banking
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

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