Working Paper: NBER ID: w26163
Authors: Lei Li; Elena Loutskina; Philip E. Strahan
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.
Keywords: banking; credit supply; deposit market power; long-term loans
JEL Codes: G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Deposit market power (G21) | Funding stability (E63) |
| Funding stability (E63) | Long-term credit extension (G21) |
| Higher deposit HHI (G59) | Longer maturity loans (G21) |
| Deposit concentration (G21) | Lower maturity premiums (G19) |
| Higher HHI (L19) | Less procyclical financing costs (G21) |
| Less procyclical financing costs (G21) | Stabilized funding sources (E63) |