As interest rates surge: flighty deposits and lending

Giuseppe Cappelletti, David Marques-Ibanez, Alessio Reghezza () and Carmelo Salleo

No 2923, Working Paper Series from European Central Bank

Abstract: How a historic drop in bank deposits shapes banks’ loan supply? We exploit the effects of a large, and unexpected, increase in monetary policy rates to estimate the deposit channel of monetary policy using an extensive credit register that includes all bank-firm lending relationships in all euro area countries. We find that banks experiencing large deposit outflows reduce credit, but not the interest rate they charge, to the same borrower relative to other lenders. This credit restriction is stronger for fixed rate and longer maturity loans, but not for riskier borrowers. The effect is mostly driven by banks coming into the hiking period with a larger unhedged duration gap that renders borrowers of those banks more vulnerable to credit restrictions due to the deposit outflows as interest rates surge. We resort to the deposit beta as an instrument variable and a matched estimator that bear out the thrust of our results. JEL Classification: E51, E58, G21

Keywords: bank deposits; banks; monetary policy (search for similar items in EconPapers)
Date: 2024-04
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec and nep-mon
Note: 2772546
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20242923

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