The Passthrough of Treasury Supply to Bank Deposits Funding

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|banks in more competitive markets experience stronger deposit out-flows. The explanatory power of Treasury supply is not driven by monetary policy and bank-specific investment opportunities. We rationalize our empiricalfindings with a model of imperfect deposit competition. Consistent with Drechsler, Savov and Schnabl (2017), the model and empirical evidence predict the opposite effect for monetary policy rate hikes: there is a larger response in less competitive markets.