Deposit Finance as a Commitment Device and the Optimal Debt Structure of Commercial Banks


  • We thank Manuel Ammann, Hendrik Hakenes, Christian Koziol, an anonymous referee, the editor John Doukas, and the seminar participants at the 2007 Annual Meeting of the European Financial Management Association, the 2007 Annual meeting of the German Finance Association, the 2008 Campus for Finance Meeting at WHU – Otto Beisheim School of Management, the 2008 Annual meeting of the AWG, and research seminar at University of St.Gallen. All remaining errors are our own. Correspondence: Jochen Lawrenz.


We consider a regulated bank with access to bond and insured deposit financing. Bank manager-owners have specific abilities, which allows them to extract rents. We show that deposit finance acts as a commitment device that has the potential to raise the overall debt capacity of the bank and increases pledgeable assets. Our focus is on the optimal mix of bond and deposit financing. We find that in the optimum, the bank chooses a debt structure so as to align internal incentives with external constraints. The model predicts that banks with more risky assets or with more specialised human capital use deposit financing to a lesser extent.