City Research Online

Abstract

We provide new evidence on how deposit funding affects bank lending. For identification, we exploit a tax reform in Italy that induced households to substitute bank bonds with deposits. We find that banks with larger increases in deposits expand the supply of credit lines and long-term credit to low-risk firms. Additional evidence indicates that these results are consistent with theories emphasizing the demandable nature of the deposit contract rather than theories stressing the stability of deposit funding due to government guarantees. In this regard, we show that banks under stress face large runs on retail deposits, but not on retail bonds.

Publication Type:	Monograph (Discussion Paper)
Additional Information:	BAFFI CAREFIN Centre Research Paper No. 2019-110
Publisher Keywords:	Banks, deposits, maturity, risk-taking, government guarantee
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School > Finance

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