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Dynamic Banking with Non-Maturing Deposits

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  • Urban Jermann
  • Haotian Xiang

Abstract

The majority of bank liabilities are deposits typically not withdrawn for extended periods. We propose a dynamic model of banks in which depositors forecast banks’ leverage and default decisions, and withdraw optimally by trading off current against future liquidity needs. Endogenous deposit maturity creates a time-varying dilution problem that has major effects on bank dynamics. Interest rate cuts produce delayed increases in bank risk which are stronger in low rate regimes. Deposit insurance can exacerbate the deposit dilution and amplify the increase in bank risk.

Suggested Citation

  • Urban Jermann & Haotian Xiang, 2023. "Dynamic Banking with Non-Maturing Deposits," NBER Working Papers 31057, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31057
    Note: AG EFG
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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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