Diverging Banking Sector: New Facts and Macro Implications

91 Pages Posted: 18 Apr 2024 Last revised: 4 May 2024

See all articles by Jinyuan Zhang

Jinyuan Zhang

UCLA Anderson School of Management

Tyler Muir

University of California, Los Angeles (UCLA) - Anderson School of Management; National Bureau of Economic Research (NBER)

Shohini Kundu

University of California, Los Angeles (UCLA) - Anderson School of Management; Centre for Economic Policy Research (CEPR)

Date Written: April 18, 2024

Abstract

We document the emergence of two distinct types of banks over the past decade: highrate banks, which align deposit rates with market interest rates, hold shorter-term assets, and primarily earn lending spreads by taking more credit risks through personal and business loans; and low-rate banks, which offer interest-insensitive, low deposit rates, hold a larger proportion of long-term securities (e.g., MBS), and make fewer loans. This divergence in the banking sector leads to a significant shift of deposits towards high-rate banks as interest rates rise, thereby reducing the sector’s overall capacity for maturity transformation and increasing its exposure to credit risk, particularly through personal loans. Our evidence suggest that technological advancements in banking spurred the divergence: high rate banks operate primarily online and attract less sticky depositors. In response, low rate banks lower rates through the retention of relatively stickier depositors.

Keywords: Banking, monetary policy, technology

Suggested Citation

Zhang, Jinyuan and Muir, Tyler and Kundu, Shohini, Diverging Banking Sector: New Facts and Macro Implications (April 18, 2024). Available at SSRN: https://ssrn.com/abstract=4798818 or http://dx.doi.org/10.2139/ssrn.4798818

Jinyuan Zhang (Contact Author)

UCLA Anderson School of Management ( email )

Los Angeles, CA
United States

Tyler Muir

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Shohini Kundu

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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