Monetary Policy, Held-to-Maturity Securities, and Uninsured Deposit Withdrawals

This paper shows that an increase in the Federal funds rate is associated with an increase in banks' unrealized losses due to their held-to-maturity (HTM) portfolio. This increase exposes banks to large uninsured deposit withdrawals as depositors seek a flight to safety. This relationship is present mainly for banks with investment portfolio losses and those with a lower capital ratio. Our results highlight the importance of banks' HTM securities when a maturity mismatch exposes them to losses and deposit withdrawals after interest rates begin to rise.