Do Systematically Important Banks Pursue Low-Cost Deposits: Insights from a Difference-in-Differences Estimation

Abstract

This study examines the impact of the classification of Domestic Systematically Important banks (DSIBs) and their approach to deposits. The research was conducted within the Indian context using a dataset of Indian banks from 2006 to 2022, with a pretreatment period of 2006-2015 and a posttreatment period of 2020-2022. The main hypothesis centers on the plausibility of DSIBs increasing their demand deposits to compensate for the constraints induced by the additional capital requirements imposed on them. A difference-in-differences (DID) estimation was performed to assess the impact of the change in classification on the deposit structure. The Breusch-Pagan test was used to assess heteroskedasticity, and a cluster-robust standard errors-based DID method was adopted to account for heteroskedasticity in the data. DID assessment was performed after controlling for total assets, which was used as a proxy for bank size. The parallel trends assumption was tested using a parallel trend test, and robustness was further checked using a Granger causality test. We find that the volume of demand deposits increased after the classification of these banks as being systematically important banks. We also find evidence that, on a comparable scale, the change in interbank deposits for DSIBs is much greater than the change in retail deposits from other sources.

Loan Portfolio Management and Bank Efficiency: A Comparative Analysis of Public, Old Private, and New Private Sector Banks in India

“…Both input-and output-oriented models have been used in banking research. Banks do not operate on the same scale within the banking industry; they vary in scale to the extent that Basel norms classify some of the larger banks as systematically important (Venugopal 2023). Banker et al (1984) proposed an appropriate DEA formulation that takes into consideration differences in scale.…”