Deposit Market Power, Funding Stability and Long-Term Credit

49 Pages Posted: 20 Aug 2019 Last revised: 27 Dec 2021

See all articles by Lei Li

Lei Li

Board of Governors of the Federal Reserve System

Elena Loutskina

University of Virginia - Darden School of Business

Philip E. Strahan

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: August 2019

Abstract

This paper shows that banks raising deposits in more concentrated markets have more funding stability, which enhances banks’ ability to extend longer-maturity loans. We show that banks raising deposits in concentrated markets exhibit less pro-cyclical financing costs and profits, which in turn reduces the funding risk of originating long-term illiquid loans. Consistently, banks with deposit HHI one standard deviation above average extend loans with about 20% longer maturity than those with deposit HHI one standard deviation below average. Deposit concentration also allows banks to charge lower maturity premiums. Access to banks raising funds in concentrated markets improves growth in industries traditionally reliant on long-term credit.

Suggested Citation

Li, Lei and Loutskina, Elena and Strahan, Philip E., Deposit Market Power, Funding Stability and Long-Term Credit (August 2019). NBER Working Paper No. w26163, Available at SSRN: https://ssrn.com/abstract=3439173

Lei Li (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Elena Loutskina

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-243-4031 (Phone)

Philip E. Strahan

Boston College - Department of Finance ( email )

Carroll School of Management
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HOME PAGE: http://www2.bc.edu/~strahan

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