Publications
Publications
- 2021
- HBS Working Paper Series
Limits to Bank Deposit Market Power
By: Juliane Begenau and Erik Stafford
Abstract
Claims about the market power of bank deposits in the banking literature are numerous and far reaching. Recently, a causal narrative has emerged in the banking literature: market power in bank deposits, measured as imperfect pass-through of short-term market rates on deposit rates, allows banks to eliminate their asset interest rate exposure and to achieve near constant net interest margin (NIM). We show that the empirical evidence does not support these conclusions. We show that neither deposits nor market power are essential for achieving stable NIM in long short fixed income portfolios. We show that matching interest income and interest expenses sensitivities to market rate movements is a consequence of achieving stable NIM, not necessarily the mechanism that allows it. Stable NIM does not imply near zero interest rate risk according to standard risk measures. Common measures of imperfect pass-through of market rates to bank deposit rates commingle two distinct mechanisms: (1) intentional rate setting and (2) mechanical consequence of comparing the changes in the periodic interest earned on positive maturity fixed coupon portfolios to changes in a short-term interest rate. The mechanical maturity consequence dominates the measured imperfect pass-through of market rates on time deposits.
Keywords
Bank Deposits; Market Power; Net Interest Margin (NIM); Banks and Banking; Interest Rates; Risk and Uncertainty
Citation
Begenau, Juliane, and Erik Stafford. "Limits to Bank Deposit Market Power." Harvard Business School Working Paper, No. 22-039, November 2021.