| This paper empirically investigates how banks of varying size invest an unsolicited inflow of deposits over the business cycle. I generate exogenous shocks to bank deposits by exploiting the development of new oil and gas fields using 'fracking' technologies that result in significant cash windfalls to landowners and large increases in local deposits. I compare the investment decisions of small- and medium-sized banks in response to these shocks and find that in normal times both types lend in response to a supply shock. The composition of their lending portfolio varies, with smaller banks investing more in 'soft' information intensive assets relative to larger banks. However, during the financial crisis small banks invest significantly less of their incremental deposits in loans, purchasing liquid assets instead. My findings suggest that during adverse times, even in a developed economy like the U.S., capital may become trapped inside small banks. |
