Working Papers
We document significant deposit interest rate differentials along the income distribution - moving from the bottom to the top income decile increases deposit rates by 55% of the sample median rate. These spreads persist independent of banking competition, and instead appear to arise from banks internalizing households' participation in nondeposit markets. Consistent with this hypothesis, only income components related to participation can explain our baseline findings, and quasi-exogenous reductions in participation incentives through increases in capital gains taxes are associated with lower spreads along the participation distribution. Our findings highlight lack of participation as a source of deposit market power.
We construct novel network-based measures of U.S. state-level bank deregulation intensity that allow us to separately identify the effects of deregulation on competition and investment opportunities. In contrast to existing studies, we find that increased competition leads to higher deposit funding costs and a reduction in banks' net interest margins and profitability. In response, banks shift their business models and persistently increase their risk-taking. Our findings resolve conflicting evidence in the literature and support theories in which reductions in bank charter values lead to higher bank risk-taking.
We examine monetary policy transmission when deposit market structure is endogenous. Expansionary monetary policy stimulates bank entry, especially when entry barriers are low. Banks' deposit quantity sensitivities are increasing in entry barriers, but the number of local banks is decreasing in entry barriers, and this channel dominates. Hence, higher entry barriers are associated with reduced monetary policy transmission. We test this prediction using novel, network-based measures of entry barrier shocks stemming from U.S. bank deregulation. Consistent with the model, local establishment and employment growth increase more in response to expansionary monetary policy when entry barriers are lower.