Risk pricing of wholesale funds and the behavior of retail deposit rates |
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| Affiliation: | 1. Department of Finance and Economics, Texas State University, San Marcos, TX 78666, United States;2. Kellstadt Graduate School of Business and The Department of Economics, DePaul University, Chicago, IL 60604, United States;1. School of Management, Beijing Normal University Zhuhai, No. 18, Jinfeng Road, Tangjiawan, Zhuhai City 519087, Guangdong Province, China;2. Department of Money and Banking, National Chengchi University, No. 64, Sec.2, ZhiNan Rd., Wenshan District, Taipei City 11605, Taiwan;1. Department of Finance, National University of Kaohsiung, Taiwan;2. Department of Real Estate & Built Environment, National Taipei University, Taiwan;1. Department of Economics and Quantitative Methods, Westminster Business School, University of Westminster, London NW1 5LS, UK;2. Department of Economics and IME, University of Salamanca, Salamanca, Spain |
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| Abstract: | We explore the relationship between bank risk and retail deposits. Predicted risk premiums on wholesale funds explain retail rate heterogeneity through two channels. First, increased bank risk premiums encourage the bank to substitute from wholesale funds to small certificates of deposits (CD) by increasing small CD rates. Second, increased rival risk premiums in a local market require the bank to increase small CD rates even more. Our results are consistent with risk encouraging the use of small CDs as a marginal source of funds and promoting local market competition for small CDs. As risk premiums rise, banks also reduce rates on other retail deposits. Our approach has implications for regulatory and monetary policies and financial stability. |
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| Keywords: | Risk-pricing/market discipline Bertrand competition Retail-market competition Rate contagion |
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