Loan loss provisions and the deposit rates yield curve at US banks

This paper examines the effect of Loan Loss Provisions (LLP’s) on US banks’ deposit rates yield curve. I find that the level of deposit rates on large, partially insured time deposits (CDs) increase with LLPs, the slope gets steeper, and the curvature of the yield curve increases. These effects are particularly pronounced for non-discretionary provisions. Furthermore, increased provisioning by banks that experience high loan growth and are profitable increases these effects, while banks that are conservative in accounting for their loan charge offs experience muted effects. In addition, non-discretionary provisions that contribute to economic capital (in excess of Tier 2 regulatory capital) mitigate these effects, while discretionary provisions have no effect. These findings provide evidence for depositor discipline and risk shifting behavior by depositors.