The rate elasticity of retail deposits in the United Kingdom: a macroeconomic investigation

Ching-Wai (Jeremy) Chiu and John Hill
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John Hill: Bank of England, Postal: Publications Group Bank of England Threadneedle Street London EC2R 8AH

No 540, Bank of England working papers from Bank of England

Abstract: This paper quantitatively studies the behaviour of major banks’ household deposit funding in the United Kingdom. We estimate a panel of Bayesian vector autoregressive models on a unique data set compiled by the Bank of England, and identify deposit demand and supply shocks, both to individual banks and in aggregate, using micro-founded sign restrictions. Based on the impulse responses, we estimate how much banks would be required to increase their deposit rates by to cover a deposit gap caused by funding shocks. Banks generally find it costly to bid-up for deposits to cover a funding gap in the short run. The elasticity of household deposits with respect to the interest rate paid are typically of the order of 0.3, indicating that retail deposits are rate-inelastic. But this varies across banks and the types of shock conditioned on. We also show evidence that banks are more vulnerable to deposit supply shocks than deposit demand shocks. Historical decompositions uncover plausible shock dynamics in the historical data.

Keywords: Retail deposits behaviour; Bayesian panel-VAR; sign restrictions. (search for similar items in EconPapers)
JEL-codes: C11 E40 G21 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2015-08-07
New Economics Papers: this item is included in nep-ban and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: The Rate Elasticity of Retail Deposits in the United Kingdom: A Macroeconomic Investigation (2018)
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