Deposit Competition, Interbank Market, and Bank Profit

Bo Jiang, Hector Tzavellas and Xiaoying Yang
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Bo Jiang: Department of Economics, Xi’an Jiaotong-Liverpool University, No.111 Ren’ai Road, SIP, Suzhou 215123, China
Xiaoying Yang: Department of Economics, George Washington University, 374 Monroe Hall, 2115 G Street NW, Washington, DC 20052, USA

JRFM, 2022, vol. 15, issue 5, 1-15

Abstract: In this paper, we study how the interbank market could impact deposit competition and bank profits. We first document two stylized facts: the net interbank funding ratio is negatively correlated with net interest margin (NIM), as well as with the cost-to-income ratio (CIR). To rationalize these two facts, we embed the interbank market into a BLP model framework. The model is calibrated using Chinese listed banks’ data. A counterfactual experiment reveals that shutting down the interbank market will lead to a decline in NIM and bank profits. Our results indicate that the interbank market can facilitate specialization and reduce the intensity of deposit competition.

Keywords: deposit competition; interbank market; structural estimation; BLP; Bank Profitability (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2022
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