Dynamic banking with non-maturing deposits

Urban Jermann and Haotian Xiang

Journal of Economic Theory, 2023, vol. 209, issue C

Abstract: The majority of bank liabilities are deposits typically not withdrawn for extended periods. We propose a dynamic model of banks in which depositors forecast banks' leverage and default decisions, and withdraw optimally by trading off current against future liquidity needs. Endogenous deposit maturity creates a time-varying dilution problem that has major effects on bank dynamics. Interest rate cuts produce delayed increases in bank risk which are stronger in low rate regimes. Deposit insurance can exacerbate the deposit dilution and amplify the increase in bank risk.

Keywords: Deposits; Debt maturity; Dilution; Time inconsistency; Monetary policy (search for similar items in EconPapers)
JEL-codes: E44 G21 G28 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Working Paper: Dynamic Banking with Non-Maturing Deposits (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:209:y:2023:i:c:s0022053123000406

DOI: 10.1016/j.jet.2023.105644

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