The deposits channel: the effect of bank deposit funding on lending behaviour during NIRP

In this thesis I examined the effect of bank deposits on the banks’ lending behavior after the introduction of negative interest rate policy (NIRP). The reluctance by banks to pass-through negative policy rates to the deposit rates – the so-called deposit channel – forms the basis for my research. In theory, high-deposit banks should experience a reduction in profitability following from compressed deposit margins resulting in a lower net worth relative to low-deposit banks. I assume this channel is active, since I find no evidence that banks increase their fee income in accordance with their dependence on deposits. I proceed by studying the market for syndicated loans and provide empirical that volume and risk have both significantly increased for high-deposit banks relative to low-deposit banks measured over the years 2013 to 2015. This finding is robust to alternative deposit ratio measurements. However, I find evidence that banks already change their volumes in anticipation of NIRP over the years 2011 to 2015, which violates the difference-in-difference identifying assumption. My results on ex-ante risk are robust to this falsification test.