On the special role of deposits for long-term lending.

I build a general equilibrium model to show that deposits are a special form of financing, that makes banks more suitable to extend long-term loans when confronted with the risks of monetary policy.
In the model, banks borrow short-term and lend long-term, are subject to a minimum equity requirement similar to Basel II, and face a financial friction: they cannot raise equity on the market. Consistently with the "bank-capital channel" of monetary policy, when the risk-free rate increases, the value of the banks' assets and equity are eroded, and the banks deleverage by cutting their lending.
I show that, thanks to a combination of banks' market power in the deposit market and of the  money-like properties of deposits, the profits on deposits are strongly countercyclical, and reduce by about one third the contraction of lending at high interest rates due to the bank capital channel.
Amid current proposals for narrow banking, this effect provides a rationale for the coexistence of lending and deposit-taking activities in current commercial banks.