Dynamic Banking with Non-Maturing Deposits

Urban Jermann and Haotian Xiang

No 31057, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The majority of bank liabilities are deposits typically not withdrawn for extended periods.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.

JEL-codes: E44 G21 G28 (search for similar items in EconPapers)
Date: 2023-03
New Economics Papers: this item is included in nep-ban, nep-fdg and nep-mac
Note: AG EFG
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Citations: View citations in EconPapers (1)

Published as Urban Jermann & Haotian Xiang, 2023. "Dynamic Banking with Non-Maturing Deposits," Journal of Economic Theory, .

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