We demonstrate the impact of treasury supply on commercial banks' funding. We show that banks widen their deposit spread as treasury supply increases, leading to a net deposit outflow. At the same time, wholesale funding ratios increase. Both effects are heterogeneous in nature --- banks in more competitive markets experience larger outflows and more pronounced jumps in wholesale funding. Results remain robust after controlling for investment opportunities and fed funds rate changes. The empirical findings are rationalized with a search model, in which banks' market power stems from the presence of inattentive depositors. Consistent with Drechsler, Savov and Schnabl (2017), the model predicts the opposite effect for Fed Funds rate hikes, i.e., a larger response in less competitive markets. Our model also sheds light on the effects of the Reverse Repo Facility.

We show that the effects of negative interest rates are amplified in the unsecured interbank market. As retail deposit rates are floored at zero while asset returns track policy rates, the use of deposit funding shrinks net returns, lowers bank capital and raises the cost of external financing. We find that deposit reliant banks face stronger downward pressure on net interest margins and are more likely to reduce lending to the same borrowing bank in the interbank market. However, deposit funded banks also tend to be more profitable and better capitalized to begin with, partially alleviating the adverse impact of negative rates.