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Busch, R., Memmel, C. Why Are Interest Rates on Bank Deposits so Low?. Credit and Capital Markets – Kredit und Kapital, 54(4), 641-668. https://doi.org/10.3790/ccm.54.4.641
Busch, Ramona and Memmel, Christoph. "Why Are Interest Rates on Bank Deposits so Low?" Credit and Capital Markets – Kredit und Kapital 54.4, 2021, 641-668. https://doi.org/10.3790/ccm.54.4.641
Busch, Ramona/Memmel, Christoph (2021): Why Are Interest Rates on Bank Deposits so Low?, in: Credit and Capital Markets – Kredit und Kapital, vol. 54, iss. 4, 641-668, [online] https://doi.org/10.3790/ccm.54.4.641

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Why Are Interest Rates on Bank Deposits so Low?

Busch, Ramona | Memmel, Christoph

Credit and Capital Markets – Kredit und Kapital, Vol. 54 (2021), Iss. 4 : pp. 641–668

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Author Details

Dr. Ramona Busch, Deutsche Bundesbank, Wilhelm-Epstein-Straße 14, 60431 Frankfurt.

Dr. Christoph Memmel, Deutsche Bundesbank, Wilhelm-Epstein-Straße 14, 60431 Frankfurt.

References

  1. Albertazzi, U./Gambacorta, L. (2009): Bank profitability and the business cycle, Journal of Financial Stability, Vol. 5(4), 393–409.  Google Scholar
  2. Assenmacher, K./Krogstrup S. (2021): Monetary policy with negative interest rates: De-linking cash from digital money, International Journal of Central Banking, Vol. 17(1), 67–106.  Google Scholar
  3. Britten-Jones, M. (1999): The sampling error in mean-variance efficient portfolios, Journal of Finance, Vol. 54, 655–671.  Google Scholar
  4. Brunetti, M./Ciciretti, R./Djordjevic, R. (2016): The determinants of household’s bank switching, Journal of Financial Stability, Vol. 26, 175–189.  Google Scholar
  5. Bulow, J. I./Pfleiderer, P. (1983): A note on the effect of cost changes on prices, Journal of Political Economy, Vol. 91(1), 182–185.  Google Scholar
  6. Busch, R./Memmel, C. (2016): Quantifying the components of the banks’ net interest margin, Financial Markets and Portfolio Management, Vol. 30(4), 371–396.  Google Scholar
  7. Busch, R./Memmel, C. (2017): Banks’ net interest margin and the level of interest rates, Credit and Capital Markets, Vol. 50(3), 363–392.  Google Scholar
  8. Claessens, S./Coleman, N./Donnelly, M. (2018): “Low-For-Long” interest rates and banks’ interest margins and profitability: Cross-country evidence, Journal of Financial Intermediation, Vol. 35, 1–16.  Google Scholar
  9. Conlisk, J. (1996): Why bounded rationality?, Journal of Economic Literature, Vol. 34(2), 669–700.  Google Scholar
  10. de Bondt, G. (2002): Retail bank interest rate pass-through: New evidence at the euro area level, ECB Working Paper Series No. 136.  Google Scholar
  11. de Bondt, G./Mojon. B./Valla, N. (2005): Term structure and the sluggishness of retail bank interest rates in the euro area countries, ECB Working Paper Series No. 518.  Google Scholar
  12. De Graeve, F./De Jonghe, O./Vennet, R. V. (2007). Competition, transmission and bank pricing policies: Evidence from Belgian loan and deposit markets, Journal of Banking and Finance 31, 259–278.  Google Scholar
  13. Deutsche Bundesbank (2004), Monthly Report, 01/2004.  Google Scholar
  14. Deutsche Bundesbank (2019), Banking Statistics, 03/2019.  Google Scholar
  15. Diamond, D. W./Dybvig, P. (1983): Bank runs, deposit insurance and liquidity, Journal of Political Economy, Vol. 91, 401–419.  Google Scholar
  16. Drechsler, I./Savov, A./Schnabl, P. (2017): The deposits channel of monetary policy, The Quarterly Journal of Economics, Vol. 132(4), 1819–1876.  Google Scholar
  17. Drechsler, I./Savov, A./Schnabl, P. (2018): Banking on deposits: Maturity transformation without interest rate risk, CEPR Discussion Paper No. DP 12950.  Google Scholar
  18. Gigineishvili, N. (2011): Determinants of interest rate pass-through: Do macroeconomic conditions and financial market structure matter?, IMF Working Paper WP/11/176.  Google Scholar
  19. Heckmann-Draisbach, L./Moertel, J. (2020): Hampered interest rate pass-through – a supply side story?, Discussion Paper 59/2020, Deutsche Bundesbank.  Google Scholar
  20. Kempf, A./Memmel, C. (2006): Estimating the global minimum variance portfolio, Schmalenbachs Business Review, Vol. 58, 332–348.  Google Scholar
  21. Kerbl, S./Simunovic, B./Wolf, A. (2019): Quantifying interest rate risk and the effect of model assumptions behind sight deposits, In: OeNB (Ed.), Financial Stability Report, Vol. 37, 73–85.  Google Scholar
  22. Kleimeier, S./Sander, H. (2017): Banking competition and interest rate pass-through, in: Bikker, J. A./Spierdijk, L. (eds.), Handbook of Competition in Banking and Finance, Edward Elgar Publishing.  Google Scholar
  23. Klein, M. A. (1971): A theory of the banking firm, Journal of Money, Credit and Banking, Vol. 3(2), 205–218.  Google Scholar
  24. Maes, K./Timmermans, T. (2005): Measuring the interest rate risk of Belgian regulated savings deposits, Financial Stability Review, National Bank of Belgium.  Google Scholar
  25. Memmel, C. (2008): Which interest rate scenario is the worst one for a bank? Evidence from a tracking bank approach for German savings and cooperative banks, International Journal of Banking, Accounting and Finance, Vol. 1(1), 85–104.  Google Scholar
  26. Memmel, C. (2014): Banks’ interest rate risk: the net interest income perspective versus the market value perspective, Quantitative Finance, Vol. 14(6), 1059–1068.  Google Scholar
  27. Mojon, B. (2000): Financial structure and the interest channel of the ECB monetary policy, ECB Working Paper No. 40.  Google Scholar
  28. Rousseas, S. (1985): A markup theory of bank loan rates, Journal of Post Keynesian Economics, Vol. 8(1), 135–144.  Google Scholar
  29. Saunders, A./Schumacher, L. (2000): The determinants of bank interest margins: An international study, Journal of International Money and Finance, Vol. 19, 813–832.  Google Scholar
  30. Schich, S. T. (1997): Estimating the German term structure, Discussion Paper Deutsche Bundesbank, Series 1, 04/1997.  Google Scholar
  31. Schlueter, T./Busch, R./Hartmann-Wendels, T./Sievers, S. (2016): Loan pricing: Do borrowers benefit from cost-efficient banking?, Credit and Capital Markets, Vol. 49, 93–125.  Google Scholar
  32. Selten, R. (1990): Bounded rationality, Journal of Institutional and Theoretical Economics, Vol. 146, 649–658.  Google Scholar
  33. Sopp, H. (2018): Interest rate pass-through to the rates of core deposits – a new perspective, Discussion Paper 25/2018, Deutsche Bundesbank.  Google Scholar
  34. Stock, J. H. (1987): Asymptotic properties of least squares estimators of cointegrating vectors, Econonometrica, Vol. 55, 1035–1056.  Google Scholar
  35. Svensson, L. E. O. (1994): Estimating and interpreting forward interest rates: Sweden 1992–94, IMF Working Paper 114.  Google Scholar
  36. Albertazzi, U./Gambacorta, L. (2009): Bank profitability and the business cycle, Journal of Financial Stability, Vol. 5(4), 393–409.  Google Scholar
  37. Assenmacher, K./Krogstrup S. (2021): Monetary policy with negative interest rates: De-linking cash from digital money, International Journal of Central Banking, Vol. 17(1), 67–106.  Google Scholar
  38. Britten-Jones, M. (1999): The sampling error in mean-variance efficient portfolios, Journal of Finance, Vol. 54, 655–671.  Google Scholar
  39. Brunetti, M./Ciciretti, R./Djordjevic, R. (2016): The determinants of household’s bank switching, Journal of Financial Stability, Vol. 26, 175–189.  Google Scholar
  40. Bulow, J. I./Pfleiderer, P. (1983): A note on the effect of cost changes on prices, Journal of Political Economy, Vol. 91(1), 182–185.  Google Scholar
  41. Busch, R./Memmel, C. (2016): Quantifying the components of the banks’ net interest margin, Financial Markets and Portfolio Management, Vol. 30(4), 371–396.  Google Scholar
  42. Busch, R./Memmel, C. (2017): Banks’ net interest margin and the level of interest rates, Credit and Capital Markets, Vol. 50(3), 363–392.  Google Scholar
  43. Claessens, S./Coleman, N./Donnelly, M. (2018): “Low-For-Long” interest rates and banks’ interest margins and profitability: Cross-country evidence, Journal of Financial Intermediation, Vol. 35, 1–16.  Google Scholar
  44. Conlisk, J. (1996): Why bounded rationality?, Journal of Economic Literature, Vol. 34(2), 669–700.  Google Scholar
  45. de Bondt, G. (2002): Retail bank interest rate pass-through: New evidence at the euro area level, ECB Working Paper Series No. 136.  Google Scholar
  46. de Bondt, G./Mojon. B./Valla, N. (2005): Term structure and the sluggishness of retail bank interest rates in the euro area countries, ECB Working Paper Series No. 518.  Google Scholar
  47. De Graeve, F./De Jonghe, O./Vennet, R. V. (2007). Competition, transmission and bank pricing policies: Evidence from Belgian loan and deposit markets, Journal of Banking and Finance 31, 259–278.  Google Scholar
  48. Deutsche Bundesbank (2004), Monthly Report, 01/2004.  Google Scholar
  49. Deutsche Bundesbank (2019), Banking Statistics, 03/2019.  Google Scholar
  50. Diamond, D. W./Dybvig, P. (1983): Bank runs, deposit insurance and liquidity, Journal of Political Economy, Vol. 91, 401–419.  Google Scholar
  51. Drechsler, I./Savov, A./Schnabl, P. (2017): The deposits channel of monetary policy, The Quarterly Journal of Economics, Vol. 132(4), 1819–1876.  Google Scholar
  52. Drechsler, I./Savov, A./Schnabl, P. (2018): Banking on deposits: Maturity transformation without interest rate risk, CEPR Discussion Paper No. DP 12950.  Google Scholar
  53. Gigineishvili, N. (2011): Determinants of interest rate pass-through: Do macroeconomic conditions and financial market structure matter?, IMF Working Paper WP/11/176.  Google Scholar
  54. Heckmann-Draisbach, L./Moertel, J. (2020): Hampered interest rate pass-through – a supply side story?, Discussion Paper 59/2020, Deutsche Bundesbank.  Google Scholar
  55. Kempf, A./Memmel, C. (2006): Estimating the global minimum variance portfolio, Schmalenbachs Business Review, Vol. 58, 332–348.  Google Scholar
  56. Kerbl, S./Simunovic, B./Wolf, A. (2019): Quantifying interest rate risk and the effect of model assumptions behind sight deposits, In: OeNB (Ed.), Financial Stability Report, Vol. 37, 73–85.  Google Scholar
  57. Kleimeier, S./Sander, H. (2017): Banking competition and interest rate pass-through, in: Bikker, J. A./Spierdijk, L. (eds.), Handbook of Competition in Banking and Finance, Edward Elgar Publishing.  Google Scholar
  58. Klein, M. A. (1971): A theory of the banking firm, Journal of Money, Credit and Banking, Vol. 3(2), 205–218.  Google Scholar
  59. Maes, K./Timmermans, T. (2005): Measuring the interest rate risk of Belgian regulated savings deposits, Financial Stability Review, National Bank of Belgium.  Google Scholar
  60. Memmel, C. (2008): Which interest rate scenario is the worst one for a bank? Evidence from a tracking bank approach for German savings and cooperative banks, International Journal of Banking, Accounting and Finance, Vol. 1(1), 85–104.  Google Scholar
  61. Memmel, C. (2014): Banks’ interest rate risk: the net interest income perspective versus the market value perspective, Quantitative Finance, Vol. 14(6), 1059–1068.  Google Scholar
  62. Mojon, B. (2000): Financial structure and the interest channel of the ECB monetary policy, ECB Working Paper No. 40.  Google Scholar
  63. Rousseas, S. (1985): A markup theory of bank loan rates, Journal of Post Keynesian Economics, Vol. 8(1), 135–144.  Google Scholar
  64. Saunders, A./Schumacher, L. (2000): The determinants of bank interest margins: An international study, Journal of International Money and Finance, Vol. 19, 813–832.  Google Scholar
  65. Schich, S. T. (1997): Estimating the German term structure, Discussion Paper Deutsche Bundesbank, Series 1, 04/1997.  Google Scholar
  66. Schlueter, T./Busch, R./Hartmann-Wendels, T./Sievers, S. (2016): Loan pricing: Do borrowers benefit from cost-efficient banking?, Credit and Capital Markets, Vol. 49, 93–125.  Google Scholar
  67. Selten, R. (1990): Bounded rationality, Journal of Institutional and Theoretical Economics, Vol. 146, 649–658.  Google Scholar
  68. Sopp, H. (2018): Interest rate pass-through to the rates of core deposits – a new perspective, Discussion Paper 25/2018, Deutsche Bundesbank.  Google Scholar
  69. Stock, J. H. (1987): Asymptotic properties of least squares estimators of cointegrating vectors, Econonometrica, Vol. 55, 1035–1056.  Google Scholar
  70. Svensson, L. E. O. (1994): Estimating and interpreting forward interest rates: Sweden 1992–94, IMF Working Paper 114.  Google Scholar

Abstract

Using granular data of German banks for the 2003 to 2018 period, we analyze the determinants of bank rates on retail deposits. We find that a bank’s rate on sight deposits is especially low if the bank operates in rural districts, if it is not exposed to strong competition and if it provides much service. Regarding the rates on term deposits, we find that the bank’s cost situation plays a role: if the bank’s costs are high, its deposit rates are low. By transferring concepts from portfolio theory to the pass-through topic, we show that replicating portfolio approaches are often equivalent to regression approaches and that, under some assumptions, the classical regression approach corresponds to a replicating portfolio approach.