Working Paper Series no. 590: How Monetary Policy Changes Bank Liability Structure and Funding Cost.

Abstract

U.S. banks obtain most of their funding from a combination of zero-interest deposits and interest-bearing deposits. Using local demographic variations as instruments for banks' liability composition, I show that when monetary policy tightens, banks with a larger proportion of zero-interest deposits on their balance sheet experience larger increases in their interest-bearing deposit rate. This happens because tight monetary policy reduces the quantity of zero-interest deposits available to banks. Banks react issuing more interest-bearing deposits, but pay an interest rate that increases with the quantity being borrowed. This new evidence supports the existence of the bank lending channel of monetary policy.

Mattia Girotti
April 2016

Classification JEL : E44, E50, G21, L16.

Keywords : Banks, Deposits, Lending Channel, Monetary Policy.