The Passthrough of Treasury Supply to Bank Deposit Funding
85 Pages Posted: 9 Jan 2019 Last revised: 10 Feb 2023
Date Written: January 17, 2023
Abstract
We demonstrate the passthrough of Treasury supply to bank deposit funding through bank market power. We show that an increase in Treasury supply crowds out bank deposits with disproportionate effects in more competitive deposit markets. The explanatory power of Treasury supply is not driven by monetary policy or banks' investment opportunities. Furthermore, a larger Treasury supply curtails bank lending and affects bank funding structure. We rationalize our empirical findings with a model of imperfect deposit competition. The model and empirics predict the opposite effect for monetary policy rate hikes, consistent with the deposits channel of monetary policy.
Keywords: safe assets, bank deposits, deposit competition, treasury supply, monetary policy
JEL Classification: G21, E50
Suggested Citation: Suggested Citation