Research

Abstract: I unveil a novel role for demand deposits. In a dynamic model where banks are better informed about the quality of their loans and investors receive noisy signals about loan performance with a delay, demand deposits can be structured to correlate investors' withdrawal decisions with asset quality while maintaining the banks solvent. This explains why small and low-credit rating banks rely heavily on certificates of deposit as their main source of funding, while larger and safer banks on traditional savings deposits. The model also predicts that even though banks' liabilities are often homogeneous, the duration of their liability structure can be very heterogeneous and, in particular, that it is U-shaped in their credit rating (f). Finally, I also show that when the economy is populated by a large fraction of sleepy depositors, staggered intermediation or an FDIC insurance policy arise as natural candidates to solve the inefficiencies caused by their lack of information.