Uniform Rate Setting and the Deposit Channel

Abstract

US banks predominantly use uniform deposit rate setting policies, particularly the largest banks. Uniform rate setting ignores local market concentration, and is therefore inconsistent with the identification strategy used to provide cross-sectional evidence of the deposit channel. Our reexamination of the various components of the deposit channel finds little evidence of a deposit price driven deposit channel. We find evidence of substantial funding substitution in the aggregate. Several reliable relationships in the cross section of banks may not aggregate because of the extreme bank size distribution and the differential behavior of small and large banks.

Keywords: Deposit Market Power, Deposit Channel, Monetary Policy Transmission, Rate Setting

JEL Classification: G21, L11