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Unintended Consequences of Unemployment Insurance Benefits: The Role of Banks

Author

Listed:
  • Yavuz Arslan

    (Department of Economics, Management School, University of Liverpool, Liverpool L69 7ZH, United Kingdom)

  • Ahmet Degerli

    (Financial Intermediaries Analysis Section, Monetary Affairs Division, Federal Reserve Board, Washington, District of Columbia 20006)

  • Gazi Kabas

    (Department of Finance, Tilburg University, 5037AB Tilburg, Netherlands)

Abstract

We use disaggregated U.S. data and a border discontinuity design to show that more generous unemployment insurance (UI) policies lower bank deposits. We test several channels that could explain this decline and find evidence consistent with households lowering their deposit holdings due to reduced precautionary savings. Because deposits are the largest and most stable source of funding for banks, the decrease in deposits affects bank lending. Banks that raise deposits in states with generous UI policies reduce their loan supply to small businesses. Furthermore, counties that are served by these banks experience a higher unemployment rate and lower wage growth.

Suggested Citation

  • Yavuz Arslan & Ahmet Degerli & Gazi Kabas, 2025. "Unintended Consequences of Unemployment Insurance Benefits: The Role of Banks," Management Science, INFORMS, vol. 71(4), pages 2847-2866, April.
    • Handle: RePEc:inm:ormnsc:v:71:y:2025:i:4:p:2847-2866
    DOI: 10.1287/mnsc.2022.03217
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