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How do banks respond to increased funding uncertainty?

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  • Robert A. Ritz
Abstract
This paper presents a simple model of risk-averse banks that face uncertainty over funding conditions in the money market. It shows when increased funding uncertainty causes interest rates on loans and deposits to rise, while bank lending and bank profitability fall. It also finds that funding uncertainty typically dampens the rate of pass-through from changes in the central bank's policy rate to market interest rates. These results help explain observed bank behaviour and reduced effectiveness of monetary policy in the 2007/9 financial crisis. Funding uncertainty also has strong implications for consumer welfare, and can turn deposits into a "loss leader" for banks.

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  • Robert A. Ritz, 2010. "How do banks respond to increased funding uncertainty?," Economics Series Working Papers 481, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:481
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    More about this item

    Keywords

    Bank lending; Interbank market; Interest rate pass-through; Loan-to-deposit ratio; Loan-deposit synergies; Loss leader; Monetary policy;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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