Speaker: Philipp Schnabl is an Associate Professor of Finance at New York University. More »
Abstract: We propose and test a new channel for the transmission of monetary policy. We show that when the Fed funds rate increases, banks widen the interest spreads they charge on deposits, and deposits flow out of the banking system. We present a model in which imperfect competition among banks gives rise to these relationships. An increase in the nominal interest rate increases banks' market power, inducing them to increase deposit spreads and hence restrict deposit supply. Households respond to the increase in deposit prices by substituting from deposits into less liquid, but higher-yielding assets. Using branch-level data on the universe of U.S. banks, we show that following an increase in the Fed funds rate, deposit spreads increase by more, and supply falls more, in areas with less deposit competition. We control for changes in banks' lending opportunities by comparing branches of the same bank in the same state. We control for changes in macroeconomic conditions by showing that deposit spreads widen immediately after a rate change and even if this change is fully anticipated. Our results imply that monetary policy has a significant impact on how the financial system is funded, on the quantity of safe and liquid assets it produces, and on its provision of loans to the real economy.
*This is a joint event with IMF.
Last Updated: Nov 30, 2015