Banks’ Internal Capital Markets and Deposit Rates

Itzhak Ben-David, Ajay Palvia and Chester Spatt

Journal of Financial and Quantitative Analysis, 2017, vol. 52, issue 5, 1797-1826

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.

Date: 2017
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Working Paper: Banks' Internal Capital Markets and Deposit Rates (2015)
Working Paper: Banks’ Internal Capital Markets and Deposit Rates (2015)
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