Unintended Consequences of Unemployment Insurance Benefits: The Role of Banks

We use disaggregated U.S. data and a border discontinuity design to show that more generous unemployment insurance (UI) policies lower bank deposits. We test several channels that could explain this decline and find evidence consistent with households lowering their deposit holdings due to reduced precautionary savings. Because deposits are the largest and most stable source of funding for banks, the decrease in deposits affects bank lending. Banks that raise deposits in states with generous UI policies reduce their loan supply to small businesses. Furthermore, counties that are served by these banks experience a higher unemployment rate and lower wage growth. This paper was accepted by Lukas Schmid, finance. Funding: G. Kabas acknowledges financial support from the European Research Council [ERC ADG 2016-GA 740272 lending]. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.03217 .