Jean-François Carpantier : jean-francois.carpantier[at]univ-amu.fr
Eric Girardin : eric.girardin[at]univ-amu.fr
We study bank-level financial intermediation business model and failure risks associated with of aggressive deposit pricing in insured household deposit market. We exploit detailed, deposit product level data from the Russian banking industry where banks engage in price-based competition for household savings by setting above the market deposit rates. Our results reveal a number of fundamental risks associated with aggressive deposit-taking bank behavior. First, we confirm that high yield deposit-taking is strongly associated with bank-level fast deposit growth and bank’s deposit market share expansion. On the asset side, aggressive deposit taking leads to elevated asset and credit risks, as revealed by fast asset growth, higher bank’s reliance on different types of risky assets and increasing yields on loans. Notably, this excessive risk-taking is not accompanied with any profitability gains; in contrast, net interest margins in banks with above the market insured deposit rates tend to shrink. Finally, we document that banks which offer high- yield deposit products have significantly higher likelihood of failure and impose large repayment burden on the Deposit Insurance Fund and the liquidation stage. Collectively, the results of this study reveal substantial funding and asset-side risks associated with high-yield deposit products in a market with a flat deposit insurance premium, aggressive competition for limited household deposit funds, and insured depositors’ disincentives to monitor banks’ behavior.