Bank Deposit Rate Clustering: Theory and Empirical Evidence

Authors

  • Charles Kahn,

    1. University of Illinois
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  • George Pennacchi,

    1. University of Illinois
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  • Ben Sopranzetti

    1. Rutgers University
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    • Kahn and Pennacchi are from the University of Illinois, Sopranzetti is from Rutgers University. We are very grateful to Douglas Evanoff, Allen Berger, Richard Rosen, and Arlene Sopranzetti for help with the empirical work of this paper. Valuable comments were provided by William Jackson, René Stulz, two anonymous referees, and by participants in seminars at Indiana University, Ohio State University, Seattle University, the University of Illinois, and the 1996 Winter Econometric Society Meetings.

ABSTRACT

Like security prices, retail deposit interest rates cluster around integers and “even” fractions. However, explanations for security price clustering are incompatible with deposit rate clustering. A theory based on the limited recall of retail depositors is proposed. It predicts that banks tend to set rates at integers and that rates are “sticky” at these levels. The propensity for integer rates increases with the level of wholesale interest rates and deposit market concentration. When banks set noninteger rates, rates are more likely to be just above, rather than just below, integers. The paper finds substantial empirical support for the theory's implications.

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