Modeling the Whole Firm: The Effect of Multiple Inputs and Financial Intermediation on Bank Deposit Rates

Elizabeth K. Kiser

37 citations0/0 files storedFinance and Economics Discussion Series

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Banking stability, regulation, efficiency Monetary Policy and Economic Impact Banking Sector Performance and Management

Abstract

Empirical studies of price competition typically analyze the direct effects of market structure, cost, and local demand on prices; this approach has been applied widely to studies of bank deposit rates. However, the theory of the banking firm suggests that substitutability between sources of deposits and conditions in the bank loan market should also affect the pricing of retail deposits. This paper develops a theoretical model to incorporate these effects, and tests the predictions empirically using institution-level deposit rate data from Bank Rate Monitor. The results suggest that the cost of large-scale deposits affects how banks price retail deposits, and that conditions in lending markets feed back into retail deposit rates.

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References

1978Specification Tests in Econometrics 2000What Do a Million Observations on Banks Say About the Transmission of Monetary Policy?1977INPUTS, OUTPUTS, AND A THEORY OF PRODUCTION AND COST AT DEPOSITORY FINANCIAL INSTITUTIONS 1997Microeconomics of Banking 1995Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade 1989The Price-Concentration Relationship in Banking 1971A Theory of the Banking Firm 1998Do Substantial Horizontal Mergers Generate Significant Price Effects? Evidence From The Banking Industry

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