Working Paper: NBER ID: w31865
Authors: Adrien Davernas; Andrea L. Eisfeldt; Can Huang; Richard Stanton; Nancy Wallace
Abstract: The deposit business differs at large versus small banks. We provide a parsimonious model and extensive empirical evidence supporting the idea that much of the variation in deposit-pricing behavior between large and small banks reflects differences in "preferences and technologies." Large banks offer superior liquidity services but lower deposit rates, and locate where customers value their services. In addition to receiving a lower level of deposit rates on average, customers of large banks exhibit lower demand elasticities with respect to deposit rate spreads. As a result, despite the fact that the locations of large-bank branches have demographics typically associated with greater financial sophistication, large-bank customers earn lower average deposit rates. Our explanation for deposit pricing behavior challenges the idea that deposit pricing is mainly driven by pricing power derived from the large observed degree of concentration in the banking industry.
Keywords: No keywords provided
JEL Codes: E0; E40; E44; G0; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Customers of large banks tend to be located in markets with higher incomes and house prices (G21) | Deposit rate sensitivity (E43) |
| Large banks providing superior liquidity services (G21) | Lower deposit rate elasticities among their customers (G21) |
| Demographic characteristics of large bank customers (G21) | Lower deposit rate sensitivity (E43) |
| Location choices of large banks (G21) | Markets where customers prioritize liquidity services over higher deposit rates (G21) |
| Large banks experience lower demand elasticities with respect to deposit rates (G21) | Customers at large banks are less responsive to changes in deposit rates (G21) |