Risk pricing of wholesale funds and the behavior of retail deposit rates

Ruby P. Kishan and Timothy P. Opiela

The North American Journal of Economics and Finance, 2017, vol. 42, issue C, 668-681

Abstract: We explore the relationship between bank risk and retail deposits. Predicted risk premiums on wholesale funds explain retail rate heterogeneity through two channels. First, increased bank risk premiums encourage the bank to substitute from wholesale funds to small certificates of deposits (CD) by increasing small CD rates. Second, increased rival risk premiums in a local market require the bank to increase small CD rates even more. Our results are consistent with risk encouraging the use of small CDs as a marginal source of funds and promoting local market competition for small CDs. As risk premiums rise, banks also reduce rates on other retail deposits. Our approach has implications for regulatory and monetary policies and financial stability.

Keywords: Risk-pricing/market discipline; Bertrand competition; Retail-market competition; Rate contagion (search for similar items in EconPapers)
JEL-codes: E44 E52 G21 G28 (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:42:y:2017:i:c:p:668-681

DOI: 10.1016/j.najef.2017.10.004

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