The prolonged period of low interest rates has been translating into compressed net interest margins for banks. In order to protect their margins, banks are making efforts to expand a low cost funding base, which includes raising more demand deposits. However, demand deposit financing gives rise to unanticipated withdrawal risk which makes banks more fragile (Diamond and Rajan, 2001). Banks may diminish this fragility by taking less risk on the asset side (Song and Thakor, 2007). This study examines whether demand deposit financing affects banks" lending behavior. The empirical results show that newly issued demand deposits do not influence bank loan supply until the next quarter, making them a less effective funding source for making loans than saving deposits. The study finds that funds financed by demand deposits have a higher likelihood of withdrawal and banks hold a more balance of liquid assets to accommodate demand depositors’ liquidity needs. It makes sense that with increased demand deposit financing, banks take a more prudent “wait and see” approach and are more reluctant to finance new loans immediately. The study provides empirical evidence for an explicit link between banks’ deposit structure and their lending behavior and the results have significant implications for banks" financing strategies.