In Search of a Risk-Free Asset

Abstract

To attract retail time deposits, over 7,000 FDIC insured U.S. commercial banks publicly post their yield offers. I document an economically sizable and highly procyclical cross-sectional dispersion in these yield offers during the period 1997-2011. Banks adjusted their yields rigidly and asymmetrically with median duration of 7 weeks in response to increasing or constant Fed Funds rate target regimes and 3 weeks during regimes of decreasing Fed Fund rate target. I investigate to what extent information (search) costs on the part of the investors in this market can explain the observed pricing behavior. I build and estimate an asset pricing model with heterogeneous search cost investors. A large fraction of high information cost uninformed investors and the exit of low information cost informed investors rationalizes the observed price dispersion. I further qualitatively match the asymmetric yield rigidity within the framework of costly consumer search without the need to impose menu costs or other restrictions on the banks' repricing behavior.

Deposit Spreads and the Welfare Cost of Inflation

“…Although the theoretically relevant price for the deposit is the spread, prices for deposits are typically quoted in terms of the interest rate rather than the spread. A large empirical literature (Hannan and Berger 1991, Neumark and Sharpe 1992, Driscoll and Judson 2013, Craig and Dinger 2014, Yankov 2014 has documented that deposit rates take some time to react to changes in interest rates, which implies that spreads over-react in the short run. The model has nothing to say about these short-run dynamics, so I attempt to estimate the relationship between spreads and interest rates that remains after spreads have had time to adjust.…”

The Effectiveness of Monetary Policy and Financial Stability: Critical Perspective from South Mediterranean Countries

“…More recently, a different view, which emphasizes the exposure of banks' interest margins to interest-rate risk, has asserted itself. A large literature documents the association between interest rates and the stability of the financial system (Driscoll and Judson, 2013;Yankov, 2014;Borio et al, 2017;Drechsler et al, 2017;Claessens et al, 2018;Drechsler et al, 2021;Akinci et al, 2022).…”

Changes in Bank Lending Standards and the Macroeconomy

“…For information on the merger-adjustment procedure for income statements, see the appendix in English and Nelson [1998] for details. 12 The enhanced resiliency to funding shocks by banks that rely heavily on core deposits to fund their interestearning assets reflects the considerable pricing power individual banks appear to enjoy in the market for this highly homogeneous financial product (see Driscoll and Judson [2013] and Yankov [2013]).…”