Financial Liberalization, Bank Market Structure, and Financial Deepening: An Interest Margin Analysis
IMF Working Papers, March 1, 2000
Source details
- Canonical URL
- Financial Liberalization, Bank Market Structure, and Financial Deepening: An Interest Margin Analysis
Other formats
Bibliographic details
- Authors: Abdourahmane Sarr
- Published: March 1, 2000
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451845686.001
Key findings
- Commercial banks’ ability to lower deposit interest rates (market power) can increase deposit mobilization.
- Interest expenses saved by banks 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, which requires greater interest rate competition.
- Lack of bank deposit market power, including through capital account mobility, may lessen financial deepening.
Mechanisms and interpretation
- Market power on deposit interest rates reduces banks’ interest expenses.
- Reduced interest expenses can be reallocated to lower service fees (checking and branching), enhancing deposit attraction.
- Substitutability between bank deposits and nonbank liabilities increases competitive pressure on deposit rates, reducing banks’ market power.
- Capital account mobility is identified as a channel that can erode bank deposit market power and thereby potentially weaken financial deepening.
Subject coverage and keywords
- Subject areas: 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; 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