Do Corporate Depositors Risk Everything for Nothing? The Importance of Deposit Relationships, Interest Rates and Bank Risk

Abstract

We analyze auctions of unsecured money market deposits of firms to banks via a FinTech platform. In each auction, only the firm observes the banks and their interest rate bids and decides where to deposit its funds. We observe that deposit interest rate bids increase monotonically with bank risk and that firms in general prefer higher deposit interest rates. However, our results show that firms’ selection of banks in which to deposit is concave in the bid interest rate in line with the general notion of credit rationing. We find this confirmed on the intensive as well as on the extensive margin. Risky banks eventually exit the market, and re-enter when their risk decreases again. Risky banks exit when the bid-interest rate increases above central bank policy rates suggesting that central bank funding crowds out deposits thereby reducing monitoring by short-term creditors. This has important implications for banks’ access to unsecured corporate funding, financial stability and the understanding of deposit markets more broadly.