The Deposits Channel of Aggregate Fluctuations

Abstract

This paper presents a new mechanism through which the geography of bank deposits increases financial fragility. We document the within-bank geographic concentration of deposits -- 30% of bank deposits are concentrated in a single county. We combine this within-bank geographic concentration of deposits with local natural-disaster-induced property damages to construct novel bank deposit shocks. On aggregate, these shocks can explain 3.30% of variation in economic growth. Local disaster shocks result in aggregate fluctuations through their effect on deposits, which negatively affect bank lending. Financial frictions such as regulatory constraints, informational advantages, and borrower constraints are critical for the aggregation of shocks.