The Deposit Business at Large vs. Small Banks

Department: Finance

Speaker: Adrien D'Avernas (Stockholm School of Economics)

Room: T015

Abstract

The deposit business differs at large versus small banks. We provide a parsimo-
nious model and extensive empirical evidence supporting the idea that much of the
variation in deposit-pricing behavior between large and small banks reflects differences
in “preferences and technologies.” Large banks offer superior liquidity services but
lower deposit rates, and locate where customers value their services. In addition to
receiving a lower level of deposit rates on average, customers of large banks exhibit
lower demand elasticities with respect to deposit rate spreads. As a result, despite the
fact that the locations of large-bank branches have demographics typically associated
with greater financial sophistication, large-bank customers earn lower average deposit
rates. Our explanation for deposit pricing behavior challenges the idea that deposit
pricing is mainly driven by pricing power derived from the large observed degree of
concentration in the banking industry.