A Multiprocess Mixture Model to Estimate Space-Time Dimensions of Weekly Pricing of Certificates of Deposit

The spatial dimension of banking markets is often discussed in the banking and finance literature, but neglected in empirical studies of behavior by depository institutions. As Anselin and Griffith (1988) point out, neglect of spatial aspects of economic behavior is not unusual, even by those working in regional science. Traditional depository institution regulatory policy, based on a structural analysis of local markets, generally operates under the assumption of the U.S. banking system as a collection of segmented markets versus an integrated national banking system. From this perspective, banks and thrifts in local regions have little or no effect on the pricing decisions of firms operating in other localities. In the deregulated banking environment of the 1980s, some bank retail deposit markets may be better characterized as operating in such a way as to generate spatial effects. As of October 1983, all depository institutions were permitted to offer competitive market rates on interest-sensitive deposits, including retail certificates of deposit (CDs). In turn, many institutions, particularly large banks, have used national advertising and brokers to attract large retail (insured) deposits from other regions. With greater deregulation and competition for deposit funds and increased reliance of banks on interest-sensitive deposits, significant spatial effects in the deposit-rate setting decisions of banks across regions might be expected. The presence or lack of spatial effects in regional bank markets is important to bank managers, analysts, and regulators in terms of defining relevant markets and measuring the competitive effects of greater deregulation.