Deposit Rate Advantages at the Largest Banks

Abstract:     
The largest banks receive a deposit risk premium. We estimate differences in the cost of funding between the largest banks and the rest of the banking industry using the actual deposit rates offered at the branch level. Unlike previous studies, we are able to eliminate many non-risk related differences between banks. We document significant and persistent differences between the largest banks and other banks in the interest rates paid on comparable deposit products and in deposit risk premiums. Between 2005 and 2008, we find that the largest banks paid a risk premium approximately 15-40 bps lower than other banks, even after controlling for balance sheet variables commonly associated with risk. Together, our findings are suggestive of an economically significant too-big-to-fail subsidy paid to the largest banks through lower risk premiums on uninsured deposits.

Number of Pages in PDF File: 37

Keywords: Too big to fail, Risk premium, Interest rates

working papers series