Banks’ Internal Capital Markets and Deposit Rates

Itzhak Ben-David, Ajay Palvia and Chester Spatt

No 21526, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A common view is 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: e.g., 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.

JEL-codes: G21 (search for similar items in EconPapers)
Date: 2015-09
New Economics Papers: this item is included in nep-ban and nep-cfn
Note: CF
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Citations: View citations in EconPapers (11)

Published as Itzhak Ben-David & Ajay Palvia & Chester Spatt, 2017. "Banks’ Internal Capital Markets and Deposit Rates," Journal of Financial and Quantitative Analysis, vol 52(05), pages 1797-1826.

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Related works:
Journal Article: Banks’ Internal Capital Markets and Deposit Rates (2017)
Working Paper: Banks' Internal Capital Markets and Deposit Rates (2015)
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