Author(s):
Rashad Ahmed
Date:
March 2024
Abstract:
Foreign deposits are a key funding source for US commercial banks but subject to a different degree of interest rate risk than domestic deposits. Specifically, foreign deposit betas are significantly larger than domestic deposit betas, implying that the former has shorter effective duration. Larger foreign deposit betas imply that the pass-through of monetary policy to bank funding costs rises and the duration of bank liabilities shortens as the foreign deposit share grows. Causal evidence exploiting granular bank-level foreign deposits suggests that banks respond to duration mismatch arising from larger foreign deposit shares by reducing holdings of US Treasuries and Agency MBS. As a result, foreign deposit dynamics jointly affect monetary policy transmission, duration absorbing capacity of the bank sector and aggregate demand for long duration assets.