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

FDIC, Division of Insurance and Research

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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HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/

Ajay A. Palvia

FDIC, Division of Insurance and Research ( email )

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United States

Chester S. Spatt

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

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

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