Payment Risk and Bank Lending

Ye Li and Yi Li
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Ye Li: Ohio State University
Yi Li: Board of Governors of the Federal Reserve System

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: Deposits finance bank lending and serve as means of payment for bank customers. Under uncertain payment flows, deposits are debts with random maturities. Payment outflows drain reserves, and the risk is most prominent when funding markets are under stress and banks are unable to smooth out payment shocks. We provide the first evidence on the negative impact of payment risk on bank lending, bridging the literatures on payment systems and credit supply. An interquartile increase in payment risk is associated with a decline in loan growth rate that is 10% of standard deviation. Our findings are stronger in times of funding stress and robust across banks of different sizes and loans of long and short maturities. Banks with higher payment risk raise deposit rates to expand customer base and internalize payment flows. Finally, we show that payment risk dampens the bank lending channel of monetary policy transmission.

JEL-codes: E42 E43 E44 E51 E52 G21 G28 (search for similar items in EconPapers)
Date: 2021-11
New Economics Papers: this item is included in nep-ban, nep-fdg, nep-mac, nep-mon and nep-pay
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Citations: View citations in EconPapers (5)

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https://dx.doi.org/10.2139/ssrn.3959110

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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2021-17

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