Deposit Franchises and Bank Duration: Income Hedges, Capital Exposure, and Monetary Quantity

Do deposit franchises hedge banks' interest-rate risk? I show that the answer depends on the margin. Using U.S. bank holding company data from 2001 to 2024, I document that stable deposits cushion bank income when rates rise: non-maturity deposits lower deposit-rate pass-through, and available liquidity protects forward net interest margins. These income hedges do not provide comparable protection for bank capital. The reason is that the deposit franchise also has a production role. Federal Reserve balance-sheet expansions predict persistent duration accumulation, especially among banks with stronger deposit franchises, while rate effects on income reverse as book yields reprice. A parsimonious banking model organizes these facts with one state, net worth; one choice, deployment intensity; and two technology characteristics, scalability and rigidity. The model clarifies why the same franchise can stabilize cash flows during tightening while helping to build the slow-repricing exposure that leaves net worth exposed when the monetary regime changes.