Payment Risk and Bank Lending: Reassessing the Bundling of Payment Services and Credit Provision
Fisher College of Business Working Paper No. 2021-03-017
Charles A. Dice Center Working Paper No. 2021-17
78 Pages Posted: 8 Nov 2021 Last revised: 17 Oct 2023
Date Written: December 18, 2021
Abstract
Banks finance lending with deposits and support the operation of payment system by allowing depositors to freely transfer funds in and out of their deposit accounts. This bundling of financial services creates a liquidity mismatch. Using granular payment data, we characterize a sizeable liquidity risk exposure that banks face due to highly volatile payment flows. Payment risk is a form of funding stability risk that is unique to banks. Our analysis demonstrates the tension between the monetary role and financing role of deposits. We find that payment risk dampens bank lending: An interquartile increase in payment risk is associated with a decline in loan growth that is 10%-20% of its standard deviation. This detrimental effect is amplified by funding stress in broader financial markets and is stronger for undercapitalized banks. Furthermore, payment risk impedes the bank lending channel of monetary policy transmission. Finally, we characterize how banks mitigate payment risk by adjusting deposit rates.
Keywords: Credit supply, deposits, payment, funding stability, monetary policy transmission
JEL Classification: E42, E43, E44, E51, E52, G21, G28
Suggested Citation: Suggested Citation