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How monetary policy changes bank liability structure and funding cost

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  • Mattia Girotti

Abstract

US banks obtain most of their funding from a combination of low-interest deposits and high-interest deposits. Using local demographic variations as instruments for banks’ liability composition, I show that when monetary policy tightens, banks with a larger proportion of low-interest deposits on their balance sheet experience larger increases in their high-interest deposit rate and lend less. This happens because tight monetary policy reduces the supply of low-interest deposits to banks, and banks react by issuing more high-interest deposits. As it is increasingly expensive, that substitution is not complete, and leads to a reduction in lending.

Suggested Citation

  • Mattia Girotti, 2021. "How monetary policy changes bank liability structure and funding cost," Oxford Economic Papers, Oxford University Press, vol. 73(1), pages 49-75.
    • Handle: RePEc:oup:oxecpp:v:73:y:2021:i:1:p:49-75.
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    File URL: http://hdl.handle.net/10.1093/oep/gpz058
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    Cited by:

    1. Chen, Xiaoxiong & Liu, Guanchun & Liu, Yuanyuan & Zhang, Yanren, 2022. "Banks’ liability structure and risk taking: Evidence from a quasi-natural experiment in China," Finance Research Letters, Elsevier, vol. 49(C).
    2. Girotti, Mattia & Horny, Guillaume, 2023. "Monetary policy transmission through banks when liquidity is abundant but unevenly distributed," Finance Research Letters, Elsevier, vol. 56(C).
    3. Mattia Girotti, 2018. "The effects of monetary policy on the composition of bank deposits and on loan supply," Rue de la Banque, Banque de France, issue 59, march.
    4. Christian Pfister & Jean-Guillaume Sahuc, 2020. "Unconventional monetary policies: A stock-taking exercise," Revue d'économie politique, Dalloz, vol. 130(2), pages 137-169.
    5. Toni Ahnert & Kartik Anand & Philipp Johann König, 2024. "Real Interest Rates, Bank Borrowing, and Fragility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(6), pages 1545-1571, September.

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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