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Banks’ Internal Capital Markets and Deposit Rates

Published online by Cambridge University Press:  31 October 2017

Itzhak Ben-David ,
Ajay Palvia  and
Chester Spatt
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Abstract

It is commonly believed 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; for example, 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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 5 , October 2017 , pp. 1797 - 1826
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

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Footnotes

1

We thank an anonymous referee, Allen Berger, Stephen Brown (the editor), Isil Erel, Darius Palia, Alberto Pozzolo, and Christian Rauch for helpful comments. We have benefited from comments of seminar participants at the 2015 Allied Social Science Association (ASSA) (International Banking, Economics and Finance Association (IBEFA) session on Banks, Government Intervention and Deregulation), Carnegie Mellon University, Case Western Reserve University, University of Cincinnati, Federal Deposit Insurance Corporation (FDIC), Federal Reserve Bank of Cleveland, the 2012 Financial Management Association (FMA) meetings (Atlanta), the Office of the Comptroller of the Currency, Ohio State University, the 2014 National Bureau of Economic Research (NBER) Corporate Finance meeting, and a webinar organized by the 2012 Global Association of Risk Professionals (GARP). The views presented in the article do not necessarily reflect those of the Office of the Comptroller of the Currency or the U.S. Department of the Treasury. Ben-David and Spatt acknowledge the financial support of the GARP Foundation. Ben-David’s research is supported by the Dice Center and the Neil Klatskin Chair in Finance and Real Estate at Ohio State University.

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