Bank Heterogeneity, Deep Habits and the Pass-through of Interest Rates

We study how heterogeneity in bank balance sheets and bank-customer relationships shapes the pass-through of interest rates to deposit rates and affects monetary policy. Using US branch-level deposit rates, we document two new stylized facts about the heterogeneous response of deposit rates to financial and monetary shocks. First, banks with the largest deposit bases reduce their relative deposit rates after both financial uncertainty shocks and contractionary monetary policy shocks. Second, highly leveraged banks respond differently across shocks: they lower their relative deposit rates after financial uncertainty shocks, but raise them after contractionary monetary policy shocks. To explain these facts, we develop a continuous-time general equilibrium heterogeneous-bank model in which banks face an occasionally binding leverage constraint, have market power in deposit markets, and accumulate customer capital through deep habits in household demand for banking services. The model is consistent with the cross-sectional distribution of banks and qualitatively reproduces the empirical impulse responses. It shows that customer capital amplifies the aggregate effects of financial and monetary shocks.