Small banks really are different: Unexpected deposit flows, loan production, and off-balance-sheet funding liquidity risk

This paper examines how bank loans evolve following unexpected deposit flows. Using bank-level U.S. commercial banks' data, we show that while large banks' lending is largely unaffected, loans at small banks significantly change after deposit shocks. Furthermore, the extent of this change among small banks depends on their exposure to off-balance-sheet liquidity risk, proxied by the level of unused commitments. Small banks with higher off-balance sheet exposures tend to extend fewer new loans following positive deposit shocks, suggesting that liquidity absorbed from the failure of other banks or market disruptions might not as easily be lent again to borrowers. Overall, these findings emphasize how off-balance-sheet risks can constrain the credit supply channel, even in the presence of liquidity surpluses.