Modeling the whole firm: the effect of multiple inputs and financial intermediation on bank deposit rates
AbstractEmpirical 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2004-07.
Date of creation: 2004
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-04-04 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Sealey, Calvin W, Jr & Lindley, James T, 1977. "Inputs, Outputs, and a Theory of Production and Cost at Depository Financial Institutions," Journal of Finance, American Finance Association, vol. 32(4), pages 1251-66, September.
- Dean F. Amel & Martha Starr-McCluer, 2001. "Market definition in banking: recent evidence," Finance and Economics Discussion Series 2001-16, Board of Governors of the Federal Reserve System (U.S.).
- Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, December.
- Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, vol. 90(3), pages 407-428, June.
- Robert M. Adams & Lars-Hendrik Röller & Robin C. Sickles, 2002.
"Market Power in Outputs and Inputs: An Empirical Application to Banking,"
CIG Working Papers
FS IV 02-33, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
- Robert M. Adams & Lars-Hendrik Roller & Robin C. Sickles, 2002. "Market power in outputs and inputs: an empirical application to banking," Finance and Economics Discussion Series 2002-52, Board of Governors of the Federal Reserve System (U.S.).
- Curtis Eaton, B. & Lipsey, Richard G., 1989. "Product differentiation," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 12, pages 723-768 Elsevier.
- Jayaratne, Jith & Morgan, Donald P, 2000. "Capital Market Frictions and Deposit Constraints at Banks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(1), pages 74-92, February.
- J. A. Hausman, 1976.
"Specification Tests in Econometrics,"
185, Massachusetts Institute of Technology (MIT), Department of Economics.
- Hancock, Diana, 1985. "The Financial Firm: Production with Monetary and Nonmonetary Goods," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 859-80, October.
- Klemperer, P., 1992.
"Competition when Consumers Have Switching Costs: An Overview,"
Economics Series Working Papers
99142, University of Oxford, Department of Economics.
- Klemperer, Paul, 1992. "Competition When Consumers Have Switching Costs: An Overview," CEPR Discussion Papers 704, C.E.P.R. Discussion Papers.
- Prager, Robin A & Hannan, Timothy H, 1998. "Do Substantial Horizontal Mergers Generate Significant Price Effects? Evidence from the Banking Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 46(4), pages 433-52, December.
- Joseph P. Hughes & Loretta J. Mester, 1997.
"Bank capitalization and cost: evidence of scale economies in risk management and signaling,"
96-2, Federal Reserve Bank of Philadelphia.
- Joseph P. Hughes & Loretta J. Mester, 1998. "Bank Capitalization And Cost: Evidence Of Scale Economies In Risk Management And Signaling," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 314-325, May.
- Joseph P. Hughes, 1997. "Bank Capitalization and Cost: Evidence of Scale Economies in Risk Management and Signaling," Departmental Working Papers 199601, Rutgers University, Department of Economics.
- Santomero, Anthony M, 1984. "Modeling the Banking Firm: A Survey," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(4), pages 576-602, November.
- Furfine, Craig H, 2001. "Banks as Monitors of Other Banks: Evidence from the Overnight Federal Funds Market," The Journal of Business, University of Chicago Press, vol. 74(1), pages 33-57, January.
- Timothy H. Hannan & Robin A. Prager, 2004.
"Multimarket bank pricing: an empirical investigation of deposit interest rates,"
Finance and Economics Discussion Series
2004-38, Board of Governors of the Federal Reserve System (U.S.).
- Hannan, Timothy H. & Prager, Robin A., 2006. "Multimarket bank pricing: An empirical investigation of deposit interest rates," Journal of Economics and Business, Elsevier, vol. 58(3), pages 256-272.
- Rosen, Richard J., 2007.
"Banking market conditions and deposit interest rates,"
Journal of Banking & Finance,
Elsevier, vol. 31(12), pages 3862-3884, December.
- Richard J. Rosen, 2003. "Banking market conditions and deposit interest rates," Working Paper Series WP-03-19, Federal Reserve Bank of Chicago.
- Hannan, Timothy H., 2006.
"Retail deposit fees and multimarket banking,"
Journal of Banking & Finance,
Elsevier, vol. 30(9), pages 2561-2578, September.
- Örs, Evren & Rice, Tara, 2007. "Bank Imputed Interest Rates: Unbiased Estimates of Offered Rates?," CEPR Discussion Papers 6036, C.E.P.R. Discussion Papers.
- Hannan, Timothy H. & Prager, Robin A., 2009.
"The profitability of small single-market banks in an era of multi-market banking,"
Journal of Banking & Finance,
Elsevier, vol. 33(2), pages 263-271, February.
- Timothy H. Hannan & Robin A. Prager, 2006. "The profitability of small, single-market banks in an era of multimarket banking," Finance and Economics Discussion Series 2006-41, Board of Governors of the Federal Reserve System (U.S.).
- Craig, Ben R. & Dinger, Valeriya, 2013.
"Deposit market competition, wholesale funding, and bank risk,"
Journal of Banking & Finance,
Elsevier, vol. 37(9), pages 3605-3622.
- Craig, B.R. & Dinger, V., 2010. "Deposit Market Competition, Wholesale Funding, and Bank Risk," Discussion Paper 2010-65S, Tilburg University, Center for Economic Research.
- Kwangwoo Park & George Pennacchi, 2007.
"Harming depositors and helping borrowers: the disparate impact of bank consolidation,"
0704, Federal Reserve Bank of Cleveland.
- Kwangwoo Park & George Pennacchi, 2009. "Harming Depositors and Helping Borrowers: The Disparate Impact of Bank Consolidation," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 1-40, January.
- Kenneth P. Brevoort & John D. Wolken, 2008. "Does distance matter in banking?," Finance and Economics Discussion Series 2008-34, Board of Governors of the Federal Reserve System (U.S.).
- Evren Örs & Tara Rice, 2006. "Bank imputed interest rates: unbiased estimates of offered rates?," Working Paper Series WP-06-26, Federal Reserve Bank of Chicago.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kris Vajs).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.