Maximilian Grimm - Uni Bonn

"The Effect of Monetary Policy on Systemic Bank Funding Stability"

Abstract

What is the effect of monetary policy on funding vulnerabilities of banking systems? I construct a novel worldwide macro-financial dataset on the funding structure of banking systems to empirically explore this question. Using an instrumental variable framework, I find that contractionary monetary policy shocks cause an aggregate outflow of retail deposits and an inflow of non-core funding sources. This increasing reliance on market-based funding instruments is associated with a heightened risk of banking panics and crises as well as subsequent contractions in non-core funding, credit, and real activity. I find evidence for a direct chain linking monetary policy, banks' funding structure, and systemic financial stability risk. A model rationalizes the mechanism through which monetary tightening drives retail deposits out of the banking system, prompting banks to increasingly rely on market-based debt, thereby raising funding vulnerabilities.

Additional information:

  • Speaker: Maximilian Grimm
  • Time: Wednesday, 23.10.2024, 14:45 - 16:00
  • Location: Faculty Lounge, Room 0.036, Online via Zoom
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  • Organizer: Finance Group
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