Unconventional Monetary Policy and Deposit Retention

The two dimensions of unconventional monetary policy — holding the short rate at the zero-lower bound (ZLB) and quantitative easing (QE) — shifted deposit composition toward more interest-sensitive customers. The ZLB drew these customers by creating rate compression, which limited the benefit of searching for high-yielding liquidity sources. QE also drew rate-sensitive, large depositors from the Federal Reserve’s purchases of bonds from non-banks. Once policy normalized, flow sensitivity and the deposit beta both increased with exposure to QE and the ZLB. We conclude that unconventional monetary policy made deposit retention costlier and riskier for banks.