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Abstract

This paper proposes a new mechanism - the Deposit Channel - by which local economic shocks propagate to other regions through multi-market banks. Using China import competition as a local economic shock, I find a significant decline in deposit growth in affected counties. Banks with a significant presence in affected counties - exposed banks - show a reduction in the growth rates of deposits, assets, and loans as well as an increase in their cost of deposit funding. Exposed banks decrease their portfolio loan origination rates by 5%, decrease the share of hard-to-securitize mortgages, and increase their loan-denial rates, even in unaffected counties. They bid up the deposit rates in affected counties while keeping them unchanged in unaffected ones. By contrast, asset-side transmission using the share of loans in affected counties as an exposure measure does not have any significant impact on bank-level outcomes.

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