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Dynamic Banking with Non-Maturing Deposits

Author

Listed:
  • Urban Jermann
  • Haotian Xiang

Abstract

The majority of bank liabilities are deposits typically not withdrawn for extended periods. We propose a dynamic model of banks in which depositors forecast banks’ leverage and default decisions, and withdraw optimally by trading off current against future liquidity needs. Endogenous deposit maturity creates a time-varying dilution problem that has major effects on bank dynamics. Interest rate cuts produce delayed increases in bank risk which are stronger in low rate regimes. Deposit insurance can exacerbate the deposit dilution and amplify the increase in bank risk.

Suggested Citation

  • Urban Jermann & Haotian Xiang, 2023. "Dynamic Banking with Non-Maturing Deposits," NBER Working Papers 31057, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31057
    Note: AG EFG
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    Cited by:

    1. Pejman Peykani & Mostafa Sargolzaei & Negin Sanadgol & Amir Takaloo & Hamidreza Kamyabfar, 2023. "The application of structural and machine learning models to predict the default risk of listed companies in the Iranian capital market," PLOS ONE, Public Library of Science, vol. 18(11), pages 1-24, November.
    2. Jermann, Urban & Xiang, Haotian, 2025. "Rules versus discretion in capital regulation," Journal of Financial Economics, Elsevier, vol. 169(C).
    3. Coulier, Lara & Pancaro, Cosimo & Pancotto, Livia & Reghezza, Alessio, 2025. "Banking on assumptions? How banks model deposit maturities," Working Paper Series 3140, European Central Bank.
    4. Marcella Lucchetta, 2024. "Welfare and bank risk-taking," Annals of Finance, Springer, vol. 20(2), pages 239-258, June.
    5. Paolo Varraso, 2025. "Banks’ Maturity Choices and the Transmission of Interest-Rate Risk," CEIS Research Paper 616, Tor Vergata University, CEIS, revised 11 Oct 2025.

    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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