The Rate Elasticity of Retail Deposits in the United Kingdom: A Macroeconomic Investigation

48 Pages Posted: 9 Aug 2015

Date Written: August 7, 2015

Abstract

This paper quantitatively studies the behaviour of major banks’ household deposit funding in the United Kingdom. We estimate a panel of Bayesian vector autoregressive models on a unique data set compiled by the Bank of England, and identify deposit demand and supply shocks, both to individual banks and in aggregate, using micro-founded sign restrictions. Based on the impulse responses, we estimate how much banks would be required to increase their deposit rates by to cover a deposit gap caused by funding shocks. Banks generally find it costly to bid-up for deposits to cover a funding gap in the short run. The elasticity of household deposits with respect to the interest rate paid are typically of the order of 0.3, indicating that retail deposits are rate-inelastic. But this varies across banks and the types of shock conditioned on. We also show evidence that banks are more vulnerable to deposit supply shocks than deposit demand shocks. Historical decompositions uncover plausible shock dynamics in the historical data.

Keywords: Retail deposits behaviour, Bayesian panel-VAR, sign restrictions

JEL Classification: C11, E40, G21

Suggested Citation

Chiu, Ching-Wai (Jeremy) and Hill, John, The Rate Elasticity of Retail Deposits in the United Kingdom: A Macroeconomic Investigation (August 7, 2015). Bank of England Working Paper No. 540, Available at SSRN: https://ssrn.com/abstract=2641028 or http://dx.doi.org/10.2139/ssrn.2641028

Ching-Wai (Jeremy) Chiu (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

John Hill

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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