Monetary Policy, HTM Securities, and Uninsured Deposit Withdrawals

This paper shows that an increase in the Fed funds rate is associated with an increase in banks' unrealized losses due to their held-to-maturity (HTM) portfolios. This exposes banks to large uninsured deposit withdrawals as the depositors seek a flight-to-safety and, at the same time, to a reduction in their stock prices as the investors become concerned about possible losses. This relationship is more pronounced for banks with less hedging against the interest rate risk and for banks with lower capital ratios. Our results highlight the importance of banks' HTM securities on how monetary policy affects their uninsured deposits and stock prices.