Deposit Market Power, Funding Stability and Long-Term Credit
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.
The authors did not receive funding for this project, other than support from their home institutions. Strahan acts as an academic visitor to the Federal Reserve Bank of New York. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.