Banks’ Internal Capital Markets and Deposit Rates

53 Pages Posted: 20 Aug 2015 Last revised: 29 Jul 2016

See all articles by Itzhak Ben-David

Itzhak Ben-David

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

Ajay A. Palvia

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Chester S. Spatt

Carnegie Mellon University - David A. Tepper School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: July 2016

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: Banks, deposit rates, market discipline, internal capital market, branches

JEL Classification: G21

Suggested Citation

Ben-David, Itzhak and Palvia, Ajay A. and Spatt, Chester S., Banks’ Internal Capital Markets and Deposit Rates (July 2016). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming; Fisher College of Business Working Paper No. 2015-03-16; Charles A. Dice Center Working Paper No. 2015-16 . Available at SSRN: https://ssrn.com/abstract=2646840 or http://dx.doi.org/10.2139/ssrn.2646840

Itzhak Ben-David (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

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Ajay A. Palvia

Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street SW
Washington, DC 20219
United States

Chester S. Spatt

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-8834 (Phone)
412-268-6689 (Fax)

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