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Banks' Internal Capital Markets and Deposit Rates

Listed author(s):
  • Ben-David, Itzhak

    (OH State University)

  • Palvia, Ajay A.

    (US of American Office of the Comptroller of the Currency)

  • Spatt, Chester S.

    (Carnegie Mellon University)

A common view is that deposit rates are determined primarily by supply: depositors require higher deposit rates from risky banks, thereby creating market discipline. An alternative perspective is that market discipline is limited (e.g., due to deposit insurance and/or enhanced capital regulation) and that internal demand for funding by banks determines rates. Using branch-level deposit rate data, we find little evidence for market discipline as rates are similar across bank capitalization levels. In contrast, banks' loan growth has a causal effect on deposit rates: e.g., branches' deposit rates are correlated with loan growth in other states in which their bank has some presence, suggesting internal capital markets help reallocate the bank's funding.

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Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2015-16.

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Date of creation: Aug 2015
Handle: RePEc:ecl:ohidic:2015-16
Contact details of provider: Phone: (614) 292-8449
Web page: http://www.cob.ohio-state.edu/fin/dice/list.htm
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