How do banks respond to increased funding uncertainty?

Robert Ritz

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: This paper presents a simple model of risk-averse banks that face uncertainty over funding conditions in the money market. It shows that increased funding uncertainty: (i) creates risk-based loan-deposit synergies, (ii) often causes banks' lending volumes and their profitability to decline, (iii) can explain more intense competition for retail deposits (including deposits turning into a "loss leader"), and (iv) typically dampens the rate of pass-through from changes in the central bank's policy rate to market interest rates. These results can explain some elements of commercial banks' behaviour and the reduced effectiveness of monetary policy during the 2007/9 financial crisis.

Keywords: Bank lending; interbank market; interest rate pass-through; loan-to-deposit ratio; loan-deposit synergies; loss leader; monetary policy (search for similar items in EconPapers)
JEL-codes: D40 E43 G21 (search for similar items in EconPapers)
Date: 2012-03-07
New Economics Papers: this item is included in nep-ban
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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https://www.econ.cam.ac.uk/sites/default/files/pub ... pe-pdfs/cwpe1213.pdf

Related works:
Journal Article: How do banks respond to increased funding uncertainty? (2015)
Working Paper: How do banks respond to increased funding uncertainty? (2014)
Working Paper: How do banks respond to increased funding uncertainty? (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:1213

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