Banks as Patient Lenders: Evidence from a Tax Reform

We test whether the composition of bank funding, and the share of deposit funding in particular, affects bank lending policies. For identification, we exploit a tax reform in Italy that created incentives for households to substitute bank bonds with deposits. Using geographically disaggregated data on deposits and securities from securities holdings statistics, we first show that the reform led to larger increases (decreases) in term deposits (bank bonds) in areas where households held more bank bonds prior to the reform. Relying on the comprehensive Italian Credit Register, we find that banks exposed to the reform did not change overall credit supply, but increase the maturity of loans to non-financial firms. Consistent with theories about depositor discipline and the role of the government safety net, we find that banks that experienced larger increases in large uninsured deposits extended less credit to riskier firms and did not increase loan maturity.