Skip to main content
  • This website sets cookies on your device. To find out more about how we use cookies please refer to our Privacy and Cookie Policy. By continuing to use the site, we’ll assume that you are content for us to set these on your device.
  • Close
Home > Research > Staff Working Paper No. 540: The rate elasticity of retail deposits in the United Kingdom: a macroeconomic investigation - Ching-Wai (Jeremy) Chiu and John Hill
 

Staff Working Paper No. 540: The rate elasticity of retail deposits in the United Kingdom: a macroeconomic investigation - Ching-Wai (Jeremy) Chiu and John Hill

07 August 2015

Staff working paper No. 540
The rate elasticity of retail deposits in the United Kingdom: a macroeconomic investigation
Ching-Wai (Jeremy) Chiu and John Hill

This paper quantitatively studies the behaviour of major banks’ household deposit funding in the United Kingdom. We estimate a panel of Bayesian vector autoregressive models on a unique data set compiled by the Bank of England, and identify deposit demand and supply shocks, both to individual banks and in aggregate, using micro-founded sign restrictions. Based on the impulse responses, we estimate how much banks would be required to increase their deposit rates by to cover a deposit gap caused by funding shocks. Banks generally find it costly to bid-up for deposits to cover a funding gap in the short run. The elasticity of household deposits with respect to the interest rate paid are typically of the order of 0.3, indicating that retail deposits are rate-inelastic. But this varies across banks and the types of shock conditioned on. We also show evidence that banks are more vulnerable to deposit supply shocks than deposit demand shocks. Historical decompositions uncover plausible shock dynamics in the historical data.

Share