Small Banks Really Are Different: Unexpected Deposit Flows, Loan Production, and Off-Balance-Sheet Funding Liquidity Risk

In this paper, we use U.S. commercial banks' data to investigate whether the effect of unexpected deposit flows on loan production depends on banks' exposure to off-balance-sheet funding liquidity risk. We find that lending is sensitive to deposit shocks at small banks but not at large ones. Furthermore, for small banks, the increase in lending that is explained by unexpected deposit inflows depends on how much they are exposed to funding liquidity risk that stems from their off-balance-sheet exposures, as measured by the level of unused commitments. Small banks that are more exposed to such funding liquidity risk tend to extend fewer new loans. Our results indicate that unexpected deposit inflows from, for instance, the failure of other banks or market disruptions might not as easily be lent again to borrowers.