We demonstrate the passthrough of Treasury supply to deposit funding through bank market power. We show that an increase in Treasury supply leads to a net deposit outflow. At the same time, reliance on wholesale funding decreases. The effect is heterogeneous in nature - banks in more competitive markets experience larger outflows. The explanatory power of Treasury supply is not driven by monetary policy and bank-specific investment opportunities. Our empirical findings are rationalized with a model of imperfect deposit competition. Consistent with "The Deposits Channel of Monetary Policy" (Drechsler et al., 2017), the model and empirics predict the opposite effect for Fed Fund rate hikes: there is a larger response in less competitive markets. Our results also shed light on the effect of the Reverse Repurchase (RRP) Facility on monetary policy pass-through.
Li, Wenhao, Yiming Ma, and Yang Zhao. "The Passthrough of Treasury Supply to Bank Deposits." Columbia Business School, January 9, 2020.
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