Financial Sophistication and Bank Market Power

Matthias Fleckenstein and Francis Longstaff

No 33049, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the relation between bank funding costs and the financial sophistication of bank customers. In doing this, we make use of a natural experiment that allows us to identify banks that—either intentionally or unintentionally—price time deposits in a way that can result in financially-unsophisticated customers essentially being shortchanged. We find that these banks have significantly lower deposit funding costs. These results provide evidence that having financially-unsophisticated customers may provide banks with substantial market power and be an important component of the value of a bank's deposit franchise.

JEL-codes: G2 G21 G51 G53 (search for similar items in EconPapers)
Date: 2024-10
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