Working Paper: NBER ID: w31380
Authors: Isil Erel; Jack Liebersohn; Constantine Yannelis; Samuel Earnest
Abstract: Financial technology has reshaped commercial banking. It has the potential to radically alter the transmission of monetary policy by lowering search costs and expanding bank markets. This paper studies the reaction of online banks to changes in federal fund rates. We find that these banks increase rates that they offer on deposits significantly more than traditional banks do. A 100 basis points increase in the federal fund rate leads to a 30 basis points larger increase in rates of online banks. Consistent with the rate movements, online bank deposits experience inflows, while traditional banks experience outflows during monetary tightening in 2022. The findings are consistent across banking markets of different competitiveness and demographics. Our findings shed new light on the role of online banks in interest rate pass-through and deposit channel of monetary policy.
Keywords: Monetary Policy; Online Banks; Financial Technology; Interest Rates
JEL Codes: E52; E58; G21; G23; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Technology and Market Power (D49) | Differential Response of Online Banks (G21) |
| Federal Funds Rate (FFR) (E43) | Deposit Rates (Online Banks) (E43) |
| Federal Funds Rate (FFR) (E43) | Deposit Rates (Traditional Banks) (E43) |
| Deposit Rates (Online Banks) (E43) | Inflows (F21) |
| Deposit Rates (Traditional Banks) (E43) | Outflows (F32) |
| Federal Funds Rate (FFR) (E43) | Loan Rates (Online Banks) (G21) |
| Federal Funds Rate (FFR) (E43) | Loan Rates (Traditional Banks) (G21) |