Demand elasticity for deposit services at U.S. retail banks in high and low rate environments

Using techniques from industrial organization, we capture the sensitivity of deposit balances to own and competitor pricing by estimating demand functions in U.S. retail deposit markets. The demand functions are used to compute elasticities of demand for bank deposits in order to study the relative...

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Bibliographic Details
Published in:Applied economics 2021-10, Vol.53 (47), p.5448-5461
Main Authors: Tanner, Noam, Zanzalari, Danielle, Manion, Mark, Haavind-Berman, Eric
Format: Article
Language:English
Subjects:
Bank deposits
Banking
capital
Demand curves
deposit pricing
Economic analysis
Economic theory
Elasticity of demand
federal funds rate
Interest rates
Price elasticity
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Summary:Using techniques from industrial organization, we capture the sensitivity of deposit balances to own and competitor pricing by estimating demand functions in U.S. retail deposit markets. The demand functions are used to compute elasticities of demand for bank deposits in order to study the relative importance of deposit rates over different interest rate environments. We find that the magnitudes of own- and cross-price elasticities are higher in high rate periods (when the federal funds rate is above 2%) than in low rate periods. We also compare different sized firms and find that smaller firms' elasticities are more sensitive to the interest rate cycle.
ISSN:0003-6846
1466-4283
DOI:10.1080/00036846.2021.1923636