Bank deposits, liquidity management and macroeconomy

Abstract

In this thesis, we investigate the role of deposits in bank liquidity management and macroeconomy empirically. The
thesis is comprised of three main chapters as follows. This first chapter investigates how banks managed their liquidity during the COVID-19 pandemic. We
evaluate three potential channels banks manage their liquidity: the supply-side through the exercise of market
discipline, the demand-side through internal capital markets, and the balance-sheet channel through unused credit
commitments and wholesale funding. We provide novel empirical evidence on the absence of market discipline
theory and internal capital market theory during the pandemic. Furthermore, it is shown that banks exposed to
higher liquidity risk tend to experience larger deposit outflows and increased their exposure in Fed's liquidity
facilities during the pandemic. The second chapter examines the US tri-party repo market operation by investigating the role of dealer's
riskiness on the repo volume and rate during the post-crisis period (2010:Q2-2019:Q4) and the starting quarter of
the pandemic (2020:Q1). We find the market perception of dealer's risk has negative impact on the reverse repo
amount the dealer undertake. In addition, the second chapter investigates the relationship between bank Liquidity
Mismatch Index (LMI) and the repo volume and rate banks undertake. We provide empirical evidence on LMI has
good explanatory power on both banks' repo volume and rate. Finally, this chapter investigates the role of heterogeneity in deposit rates on predicting the severity of crisis
and output. We show an increase in the heterogeneity has strong predicting power on the future economic
downturns. More importantly, it is found an increase in the heterogeneity in deposit rates coupled with a fragile
financial condition, leads to a more severe crisis. In addition, we show the changes in effective federal funds rate
and deposit rates have significant negative impact on household's consumption and income, and this effect is
heterogeneous among households according to balance sheet positions. This thesis contributes to the ongoing debates on bank liquidity management and the deposits channel of
monetary policy transmission. The findings have important policy implications by showing the unique role of bank
deposits in bank liquidity management and macroeconomy. Our main findings suggest that policy makers should be
aware of the importance of liquidity facilities provided by the Federal Reserve and the repo market, especially
during the liquidity stressed periods, as they are playing an essential role in funding bank's liquidity. Moreover, our
findings relating to households suggest policy makers should aware that the effects on households' consumption
from interest rate changes are heterogeneous among households based on their balance sheet positions.