Why Are Interest Rates on Bank Deposits so Low?
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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
6 Citations (CrossRef)
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Dr. Ramona Busch, Deutsche Bundesbank, Wilhelm-Epstein-Straße 14, 60431 Frankfurt.
Dr. Christoph Memmel, Deutsche Bundesbank, Wilhelm-Epstein-Straße 14, 60431 Frankfurt.
Cited By
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References
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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 -
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.
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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 -
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.
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Google Scholar -
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Google Scholar -
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 -
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 -
Mojon, B. (2000): Financial structure and the interest channel of the ECB monetary policy, ECB Working Paper No. 40.
Google Scholar -
Rousseas, S. (1985): A markup theory of bank loan rates, Journal of Post Keynesian Economics, Vol. 8(1), 135–144.
Google Scholar -
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 -
Schich, S. T. (1997): Estimating the German term structure, Discussion Paper Deutsche Bundesbank, Series 1, 04/1997.
Google Scholar -
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 -
Selten, R. (1990): Bounded rationality, Journal of Institutional and Theoretical Economics, Vol. 146, 649–658.
Google Scholar -
Sopp, H. (2018): Interest rate pass-through to the rates of core deposits – a new perspective, Discussion Paper 25/2018, Deutsche Bundesbank.
Google Scholar -
Stock, J. H. (1987): Asymptotic properties of least squares estimators of cointegrating vectors, Econonometrica, Vol. 55, 1035–1056.
Google Scholar -
Svensson, L. E. O. (1994): Estimating and interpreting forward interest rates: Sweden 1992–94, IMF Working Paper 114.
Google Scholar -
Albertazzi, U./Gambacorta, L. (2009): Bank profitability and the business cycle, Journal of Financial Stability, Vol. 5(4), 393–409.
Google Scholar -
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 -
Britten-Jones, M. (1999): The sampling error in mean-variance efficient portfolios, Journal of Finance, Vol. 54, 655–671.
Google Scholar -
Brunetti, M./Ciciretti, R./Djordjevic, R. (2016): The determinants of household’s bank switching, Journal of Financial Stability, Vol. 26, 175–189.
Google Scholar -
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 -
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 -
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 -
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 -
Conlisk, J. (1996): Why bounded rationality?, Journal of Economic Literature, Vol. 34(2), 669–700.
Google Scholar -
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 -
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 -
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 -
Deutsche Bundesbank (2004), Monthly Report, 01/2004.
Google Scholar -
Deutsche Bundesbank (2019), Banking Statistics, 03/2019.
Google Scholar -
Diamond, D. W./Dybvig, P. (1983): Bank runs, deposit insurance and liquidity, Journal of Political Economy, Vol. 91, 401–419.
Google Scholar -
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 -
Drechsler, I./Savov, A./Schnabl, P. (2018): Banking on deposits: Maturity transformation without interest rate risk, CEPR Discussion Paper No. DP 12950.
Google Scholar -
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 -
Heckmann-Draisbach, L./Moertel, J. (2020): Hampered interest rate pass-through – a supply side story?, Discussion Paper 59/2020, Deutsche Bundesbank.
Google Scholar -
Kempf, A./Memmel, C. (2006): Estimating the global minimum variance portfolio, Schmalenbachs Business Review, Vol. 58, 332–348.
Google Scholar -
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 -
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 -
Klein, M. A. (1971): A theory of the banking firm, Journal of Money, Credit and Banking, Vol. 3(2), 205–218.
Google Scholar -
Maes, K./Timmermans, T. (2005): Measuring the interest rate risk of Belgian regulated savings deposits, Financial Stability Review, National Bank of Belgium.
Google Scholar -
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 -
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 -
Mojon, B. (2000): Financial structure and the interest channel of the ECB monetary policy, ECB Working Paper No. 40.
Google Scholar -
Rousseas, S. (1985): A markup theory of bank loan rates, Journal of Post Keynesian Economics, Vol. 8(1), 135–144.
Google Scholar -
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 -
Schich, S. T. (1997): Estimating the German term structure, Discussion Paper Deutsche Bundesbank, Series 1, 04/1997.
Google Scholar -
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 -
Selten, R. (1990): Bounded rationality, Journal of Institutional and Theoretical Economics, Vol. 146, 649–658.
Google Scholar -
Sopp, H. (2018): Interest rate pass-through to the rates of core deposits – a new perspective, Discussion Paper 25/2018, Deutsche Bundesbank.
Google Scholar -
Stock, J. H. (1987): Asymptotic properties of least squares estimators of cointegrating vectors, Econonometrica, Vol. 55, 1035–1056.
Google Scholar -
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.