The impact of interbank and public debt markets on the competition for bank deposits

Abstract

The growth in the interest rates paid on Spanish public debt since 2008 and the impairment of the interbank market have generated concerns about their effects on competition for bank deposits in Spain. I combine a nested logit model of bank deposit supply with a structural model of competition to measure the impact of the reference interest rates on public debt and interbank markets on the returns on deposits and funding policy of Spanish banks during 2003–2010. The interbank rate is found to be more closely correlated with the return on deposits than the interest rate on public debt, but the connection between interbank rates and deposit returns is significantly weaker in the crisis period 2008–2010. Counterfactual analysis shows an important effect of the interbank rate and investment opportunities in public debt on deposit rates and bank profits, and that observed deposit rates are on average 115 bp above collusive levels.