IDEAS home Printed from https://ideas.repec.org/p/bof/bofrdp/1994_018.html
   My bibliography  Save this paper

Risk sharing in the pricing of payment services by banks

Author

Listed:
  • Tarkka, Juha

Abstract

The banking industry has traditionally covered a large part of its operating costs by net interest earnings, based on the spread between deposit and lending rates.This reflects the common practice of underpricing various services provided to customers, especially depositors.The purpose of this paper is to present an explanation to this phenomenon by analyzing the pricing of transaction deposit accounts as arrangements for pooling transaction cost uncertainty among depositors.It turns out that, when transactions are stochastic, and depositors are risk averse, there is an incentive to minimize explicit transaction charges.Moral hazard may explain why some service charges are applied, however.

Suggested Citation

  • Tarkka, Juha, 1994. "Risk sharing in the pricing of payment services by banks," Research Discussion Papers 18/1994, Bank of Finland.
  • Handle: RePEc:bof:bofrdp:1994_018
    as

    Download full text from publisher

    File URL: https://helda.helsinki.fi/bof/bitstream/123456789/7815/1/SP_DP_1994_18.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. White, Lawrence H, 1987. "Accounting for Non-interest-Bearing Currency: A Critique of the Legal Restrictions Theory of Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(4), pages 448-456, November.
    2. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-1367, November.
    3. Startz, Richard, 1979. "Implicit interest on demand deposits," Journal of Monetary Economics, Elsevier, vol. 5(4), pages 515-534, October.
    4. Richard Startz, 1983. "Competition and Interest Rate Ceilings in Commercial Banking," The Quarterly Journal of Economics, Oxford University Press, vol. 98(2), pages 255-265.
    5. Tarkka, Juha, 1989. "Competitive deposit rates and bank service charges," Research Discussion Papers 26/1989, Bank of Finland.
    6. Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-1190, September.
    7. Whitesell, William C, 1989. "The Demand for Currency versus Debitable Accounts: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(2), pages 246-257, May.
    8. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-328, March.
    9. Whitesell, William C, 1992. "Deposit Banks and the Market for Payment Media," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(4), pages 483-498, November.
    10. Harry G. Johnson, 1968. "Problems of Efficiency in Monetary Management," Journal of Political Economy, University of Chicago Press, vol. 76, pages 971-971.
    11. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    12. Saving, Thomas R, 1979. "Money Supply Theory with Competitively Determined Deposit Rates and Activity Charges," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(1), pages 22-31, February.
    13. Fischer, Stanley, 1983. "A Framework for Monetary and Banking Analysis," Economic Journal, Royal Economic Society, vol. 93(369a), pages 1-16, Supplemen.
    14. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August.
    15. Neil Wallace, 1983. "A legal restrictions theory of the demand for "money" and the role of monetary policy," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win.
    16. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bof:bofrdp:1994_018. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Minna Nyman). General contact details of provider: http://edirc.repec.org/data/bofgvfi.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.