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  5. Bank Switching Costs
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Bank Switching Costs

Paper Session

Sunday, Jan. 7, 2024 1:00 PM - 3:00 PM (CST)

Grand Hyatt, Lone Star Ballroom Salon F
Hosted By: American Economic Association
  • Chair: Mary Amiti, Federal Reserve Bank of New York

Quantifying Bank Switching Costs

David Weinstein
,
Columbia University
Mary Amiti
,
Federal Reserve Bank of New York
Anil Kashyap
,
University of Chicago
Anna Kovner
,
Federal Reserve Bank of New York

Abstract

The costs for a borrower of switching banks is a central factor in determining whether a contraction in lending translates into effects for the real economy.  We use confidential regulatory data on the relationships between the largest US banks and their borrowers to determine when borrowers switch. Typically a borrower rolls over an expiring loans at their original lender, but in some cases doing so indicates that they are forgoing substantial savings that would be available if they did switch. The costs of switching banks are highest for smaller and riskier borrowers.  Costs also depend on the type of loan and its maturity.  We also explore how switching costs change with the market share of banks in a given local market. These estimates can inform discussion of how monetary policy is transmitted and how bank failures, or other shocks that simply impair lending capacity affect bank borrowers and the economy.

The Impact of Credit Substitution between Banks on Investment

Francesco Bripi
,
Bank of Italy

Abstract

This paper estimates the elasticity of substitution across banks using matched bank-firm data. It also finds that credit supply shocks have significant effects on firms’ investments in industries with a lower substitutability. In these industries, where firms find it difficult to acquire funding and obtain better credit conditions from other banks, a 10 per cent increase in credit supply increases firms’ investment rate by 2 per cent. The effect of lenders substitutability on investment offsets that of bank specialization, thus highlighting that the risks of excessive bank concentration in specific industries may be alleviated by substituting lenders. Overall, the evidence suggests that considering the demand side, i.e. the heterogeneous effects of the elasticity of substitution in credit markets, is crucial for a better understanding of the bank lending channel.

Managing the Risks of Bank Deposits

Itamar Drechsler
,
University of Pennsylvania
Alexi Savov
,
New York University
Philipp Schnabl
,
New York University

Abstract

Banks hedge the interest rate risk of their assets with their deposit franchise.  When interest rates go up, the value of the assets falls while the value of the deposit franchise rises.  But the deposit franchise is intangible, and its value depends on the behavior of depositors, which is uncertain.  We use the massive expansion of deposits during Covid to study how banks deal with this uncertainty and the consequences of getting it wrong.  We find that banks adjusted the duration of their assets in line with their deposit betas from the previous cycle (2015-2019).  However, these betas were low by historical standards because the cycle was unusually shallow and came after a long period of zero interest rates.  As a result, banks’ asset duration was relatively long going into the 2022-2023 hiking cycle.  We find this created a mismatch for some banks whose 2022-2023 deposit betas came in significantly higher than their 2015-2019 betas.  This was especially true of banks with large uninsured deposits.  These banks suffered a compression in net interest margin, larger outflows of deposits, and larger stock declines during the 2023 banking turmoil.  However, the overall banking sector was relatively unaffected, suggesting that most banks anticipated the behavior of their depositors.

Discussant(s)
Mark Flannery
,
University of Florida
Jose Peydro
,
Imperial College London
Amit Seru
,
Stanford University
JEL Classifications
  • G0 - General
  • E0 - General