On the Special Role of Deposits for Long-Term Lending

MPRA Paper from University Library of Munich, Germany

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%.

Keywords: Deposits; Banks; Long-Term Lending; Narrow Banking (search for similar items in EconPapers)
JEL-codes: E5 G21 (search for similar items in EconPapers)
Date: 2019-10-25
New Economics Papers: this item is included in nep-ban, nep-mac and nep-mon
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Related works:
Working Paper: On the Special Role of Deposits for Long-Term Lending (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:101932

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