NDLI: Banks as Interest Rate Managers

Content Provider	Springer Nature Link
Author	Green, Christopher J.
Copyright Year	1998
Abstract	Most banks have a two-tier pricing system, offering accounts at market-related interest rates and at posted rates that are changed at discrete intervals. In this paper, I develop a model of bank interest rate management. I consider a bank with two classes of loans and deposits in its balance sheet: One pays a market rate of interest, the other a posted rate. Market rates are exogenous and evolve stochastically over time. Posted rates are altered intermittently by the bank itself. The bank faces imperfect arbitrage by its customers between posted and market rate funds. Under simple assumptions about the stochastic process governing the market rate, I derive optimal decision rules for the adjustment of the posted rate and determine conditions under which these rules are asymmetric. A key prediction of the model is a negative correlation between market loan rates and the “gap”; this is more consistent with the behavior of British banks than is the contrary prediction of more “standard” models.
Starting Page	189
Ending Page	208
Page Count	20
File Format	PDF
ISSN	09208550
Journal	Journal of Financial Services Research
Volume Number	14
Issue Number	3
e-ISSN	15730735
Language	English
Publisher	Kluwer Academic Publishers
Publisher Date	1998-01-01
Publisher Place	Boston
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	Macroeconomics/Monetary Economics Finance /Banking
Content Type	Text
Resource Type	Article
Subject	Finance Accounting Economics and Econometrics

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