Keywords: Financial intermediation, deposit rates
Abstract: Empirical studies of price competition typically analyze the direct effects of market
structure, cost, and local demand on prices; this approach has been applied widely to
studies of bank deposit rates. However, the theory of the banking firm suggests that
substitutability between sources of deposits and conditions in the bank loan market
should also affect the pricing of retail deposits. This paper develops a theoretical model
to incorporate these effects, and tests the predictions empirically using institution-level
deposit rate data from Bank Rate Monitor. The results suggest that the cost of large-scale
deposits affects how banks price retail deposits, and that conditions in lending
markets feed back into retail deposit rates.
Full paper (723 KB PDF)
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Last update: February 17, 2004