Deposit Composition and Commercial Bank Earnings

Abstract

Tins THESIS INVESTIGATES the relation between deposit composition and the earnings of commercial banks. A model of a commercial bank is developed in which its revenue-cost position is reduced to a function of its deposits and capital. Multiple regression analysis is then applied to individual bank data in order to estimate the marginal net rates of return which banks realize on their demand deposits, time deposits, and capital stock. These rates of return are estimated net of the cost of servicing deposits and managing assets. The interest cost of time deposits, however, is presented separately. The data used to test the model consist of a cross section of 295 banks from the state of Ohio, for the period from 1963 to 1966.To test the hypothesis that marginal net rates of return may be influenced by bank size, separate regressions were estimated for banks with total deposits of under and over ten million dollars. The hypothesis that marginal net rates of return were identical for banks in these two size groupings could not be rejected at the one per cent level of significance. The explanation offered here is that the lower servicing costs at large banks were offset approximately by a smaller interest return on their assets.Marginal net rates of return on demand deposits held by the public averaged about 1.2 per cent. In contrast, net rates of return on time and savings deposits were generally in excess of 3.5 per cent, over most of the four year period. The higher net rate of return on time deposits is explained by lower servicing cost, lower reserve requirements, and the tendency of banks to place a greater proportion of these funds into high earning assets. Net rates of return were found to differ among categories of time deposits and demand deposits. The net rate of return on time deposits held by government units was consistently higher than net rates of return on other types of time and savings deposits. Interbank demand deposits also proved to be quite profitable for commercial banks. Net rates of return on these deposits were higher than net rates of return on other categories of both time deposits and demand deposits.The model used to estimate marginal net rates of return was specified so as to exclude the interest cost of time deposits. A comparison between estimated marginal rates of return on time deposits and average interest cost provides some interesting results. For each year of the four year period, estimated marginal net rates of return on time deposits exceeded average interest costs. The difference, however, was less than the estimated net rate of return on demand deposits. That the positive difference between estimated marginal rates of return on time deposits and average interest costs was not competed away is attributed to the absence of pure competition in the market for deposits and ceiling rates of interest. During the four year period, marginal rates of return on deposits increased in response to a rise in interest rates on bank assets. Average interest cost also increased. This indicates...

The Effects of Control Status on Commercial Bank Profitability

“…The relative rates of earnings on deposits, b = .2924 and c = .0594, agree with the findings of both Bond [4] and Horvitz [9]. The marginal return on demand deposits is much greater than that on time and savings deposits.Î…”

Deregulation, Deposit Markets, and Banks' Costs of Funds

“…Bond [3] has shown that demand deposits have a higher profit rate than time deposits due to interest rate restrictions. Haslem and Longbrake [9] and Wall [18] have shown that banks whose deposit composition favored regulated deposit funds correlate positively with those banks that exhibit high relative profitability.…”

“…Substituting equations (2) and (3) into equation (l), adding a disturbance term, and rearranging, we get the following estimating equation:…”