Deposit market power, funding stability and long-term credit

Abstract

By increasing funding stability, deposit market power reduces banks’ funding risk over the cycle and provides the flexibility to originate long-term loans. Banks with deposit HHI one standard deviation above average extend loans with about 20% longer maturity than those one standard deviation below average. Deposit market power also allows banks to charge lower maturity premiums. The effects persist in the sample of zero-duration, floating rate loans. This has real effects: access to banks raising funds in less competitive markets improves growth in bank-dependent borrowers needing long-term finance. Deposit market power, by stabilizing bank funding costs, helps alleviate credit cycles.