Working Paper: NBER ID: w21526
Authors: Itzhak Bendavid; Ajay Palvia; Chester Spatt
Abstract: A common view is that deposit rates are determined primarily by supply: depositors require higher deposit rates from risky banks, thereby creating market discipline. An alternative perspective is that market discipline is limited (e.g., due to deposit insurance and/or enhanced capital regulation) and that internal demand for funding by banks determines rates. Using branch-level deposit rate data, we find little evidence for market discipline as rates are similar across bank capitalization levels. In contrast, banks’ loan growth has a causal effect on deposit rates: e.g., branches’ deposit rates are correlated with loan growth in other states in which their bank has some presence, suggesting internal capital markets help reallocate the bank’s funding.
Keywords: Deposit Rates; Internal Capital Markets; Market Discipline; Loan Growth
JEL Codes: G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bank capitalization levels (G28) | deposit rates (E43) |
| loan growth (G21) | deposit rates (E43) |
| loan growth (G21) | deposit rates (E43) |
| internal capital markets (G19) | deposit rates (E43) |