Financial Liberalization, Bank Market Structure, and Financial Deepening

The paper shows that commercial banks’ ability to lower deposit interest rates (market power) can increase deposit mobilization. Interest expenses saved can subsidize and lower fees on checking and branching services and thus help attract deposits. United States data illustrates the financial deepening effect of this market power. Commercial banks’ ability to lower deposit interest rates diminishes when their deposits become closer substitutes to nonbank liabilities requiring greater interest rate competition. Lack of bank deposit market power, including through capital account mobility, may lessen financial deepening.Banking;Interest rates;Economic models;deposit interest, deposit interest rates, banking services, banking industry, bank interest, financial liberalization, interest rate ceilings, deposit rates, bank deposit, financial institutions, deposit insurance, financial markets, bank interest margins, partial derivatives, banking system, bank services, financial repression, financial sector, bank branches, resource mobilization, demand deposit, interest expense, deposit rate, bank interest margin, banking service, branch banking, bank market, banking sector, savings deposits, partial derivative, federal deposit insurance, financial intermediaries, bank deposits, banking model, banking markets, interest rate deregulation, derivative, bank interest rate, stock value, hedges, banking activities, banking crises, bank operations, banking deposits, banking firm, net interest margin, foreign exchange, banks ? liabilities, bank products, bank branch, interest rate controls, bank liquidity, banking transaction, financial resources, retail banking, bank spread, bond market, financial market, banking industries, bank loans, reserve requirements, bond, disintermediation, bank intermediation, bank offices