Shohini Kundu, University of California-Los Angeles
Amiyatosh Purnanandam, University of Michigan
Abstract: We examine the financial stability implications of deposit insurance using reciprocal deposits, a financial innovation through which banks can break up large deposits and place them with others in an offsetting manner. Exploiting a regulatory change that incentivized some banks to join the network, we show that higher insurance coverage allowed banks to stem deposit outflows during the 2023 banking crisis. Network banks paid lower deposit rates, grew larger, and expanded their local deposit market share, while assuming greater exposure to interest rate risk. We discuss the trade-offs of deposit insurance and its impact on the banking sector's industrial organization.
Discussant: Edward Prescott, Federal Reserve Bank of Cleveland
Abstract: By lending to a firm, inside banks gain an informational advantage over outside banks, enabling them to hold up borrowers and extract informational rents. Using unique data on firm-bank deposit and lending relationships in Norway, we show that deposit relationships between firms and outside banks mitigate inside banks’ informational advantage, thereby attenuating hold-up. This result holds using quasi-random variation in deposit relationships induced by the deposit insurance threshold, and is driven by the fact that firms’ deposit account activity provides valuable information to outside banks (not cross-selling). Overall, our paper offers the first evidence that deposit relationshipsimpact lender competition.
Discussant: Fulvia Fringuellotti, Federal Reserve Bank of New York
Christopher Palmer, Massachusetts Institute of Technology
Abstract: This paper examines deposit stickiness using account-level data from over 10 million accounts across 152 U.S. credit unions. We find significant skewness in deposit distributions, with 10% of depositors controlling 70% of total deposits. Aggregate deposit stickiness is driven by high-balance depositors. Using unexpected changes in Fed Funds rates as exogenous variation in the opportunity cost of holding deposits, we show that low-balance depositors are sensitive to changes in interest rates, but high-balance depositors are not. High-balance depositors are also relatively insensitive to discontinuous interest rate jumps at specific balance thresholds and are more likely to experience periods of prolonged inactivity followed by large reductions in account balances. Our evidence suggests that deposit stickiness is driven by relatively few high-balance accounts that are used as liquidity pools rather than for long-term savings.
