IMF Working Papers

Financial Liberalization, Bank Market Structure, and Financial Deepening: An Interest Margin Analysis

ByAbdourahmane Sarr

March 1, 2000

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Abdourahmane Sarr. "Financial Liberalization, Bank Market Structure, and Financial Deepening: An Interest Margin Analysis", IMF Working Papers 2000, 038 (2000), accessed 12/21/2025, https://doi.org/10.5089/9781451845686.001

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The paper shows that commercial banks’ ability to lower deposit interest rates (market power) can increase deposit mobilization. Interest expenses saved can subsidize and lower fees on checking and branching services and thus help attract deposits. United States data illustrates the financial deepening effect of this market power. Commercial banks’ ability to lower deposit interest rates diminishes when their deposits become closer substitutes to nonbank liabilities requiring greater interest rate competition. Lack of bank deposit market power, including through capital account mobility, may lessen financial deepening.

Subject: Bank deposits, Banking, Commercial banks, Deposit rates, External debt, Financial institutions, Financial services, Interest payments, Interest rate ceilings, Loans

Keywords: bank deposit, bank market structure, banking industry, ceiling regulation, commercial bank, Commercial banks, demand slope, deposit demand slope, deposit interest rate ceiling, deposit interest rate market power, deposit market power, Deposit rates, financial deepening, Financial liberalization, interest margin, interest market power, Interest payments, Interest rate ceilings, interest rate regulation, Loans, market power, market structure, price war, regulation in the U.S., WP

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