Banks’ Internal Capital Markets and Deposit Rates
53 Pages Posted: 20 Aug 2015 Last revised: 29 Jul 2016
Date Written: July 2016
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: Suggested Citation