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Deposit Competition, Interbank Market, and Bank Profit

Author

Listed:
  • Bo Jiang

    (Department of Economics, Xi’an Jiaotong-Liverpool University, No.111 Ren’ai Road, SIP, Suzhou 215123, China)

  • Hector Tzavellas

    (Department of Economics, Virginia Tech, Pamplin 3118, Blacksburg, VA 24061, USA)

  • Xiaoying Yang

    (Department of Economics, George Washington University, 374 Monroe Hall, 2115 G Street NW, Washington, DC 20052, USA)

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.

Suggested Citation

  • Bo Jiang & Hector Tzavellas & Xiaoying Yang, 2022. "Deposit Competition, Interbank Market, and Bank Profit," JRFM, MDPI, vol. 15(5), pages 1-15, April.
    • Handle: RePEc:gam:jjrfmx:v:15:y:2022:i:5:p:194-:d:797963
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    References listed on IDEAS

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