Deposit flows and the January effect in deposit rates

Noninterest‐bearing deposits (NIBDs) flow out of U.S. banks in January and February. Banks respond to this seasonal outflow by increasing interest‐bearing deposit (IBD) rates. We document that branch‐level deposit spreads are 4 to 11 basis points higher in January than in December. Increasing rates works as banks replace four‐fifths of the lost NIBDs with IBDs. We also find that, following NIBD outflows, banks resist cutting lending but pass the increases in the cost of funds onto borrowers. Banks do cut lending in response to total deposit outflows, but only in the pre‐crisis period.