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How Did Depositors Respond to COVID-19?
[A crisis of banks as liquidity providers]

Author

Listed:
  • Ross Levine
  • Chen Lin
  • Mingzhu Tai
  • Wensi Xie

Abstract

Why did banks experience massive deposit inflows during the pandemic? We discover that deposit interest rates at bank branches in counties with higher COVID-19 infection rates fell by more than rates at branches—even branches of the same bank—in counties with lower infection rates. Credit drawdowns, national policies, such as the Payment Protection Program, and a flight-to-safety do not account for these cross-branch changes in deposit rates. Evidence suggests that higher local COVID-19 infection rates are associated with households’ greater anxiety about future job and income losses, anxiety that induces households to reduce spending and increase deposits.

Suggested Citation

  • Ross Levine & Chen Lin & Mingzhu Tai & Wensi Xie, 2021. "How Did Depositors Respond to COVID-19? [A crisis of banks as liquidity providers]," The Review of Financial Studies, Society for Financial Studies, vol. 34(11), pages 5438-5473.
    • Handle: RePEc:oup:rfinst:v:34:y:2021:i:11:p:5438-5473.
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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G50 - Financial Economics - - Household Finance - - - General
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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