How do banks respond to increased funding uncertainty?

Robert Ritz

No 481, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: This paper presents a simple model of risk-averse banks that face uncertainty over funding conditions in the money market. It shows when increased funding uncertainty causes interest rates on loans and deposits to rise, while bank lending and bank profitability fall. It also finds that funding uncertainty typically dampens the rate of pass-through from changes in the central bank's policy rate to market interest rates. These results help explain observed bank behaviour and reduced effectiveness of monetary policy in the 2007/9 financial crisis. Funding uncertainty also has strong implications for consumer welfare, and can turn deposits into a "loss leader" for banks.

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: G01 G21 (search for similar items in EconPapers)
Date: 2010-03-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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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? (2012)
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