Determinants of Interest Rates on Time Deposits and Savings Accounts: Macro Factors, Bank Risk, and Account Features

• Date: 01 June 2018
• Author: Dirk F. Gerritsen,Jacob A. Bikker
• DOI: http://doi.org/10.1111/irfi.12143
• Published date: 01 June 2018

Determinants of Interest Rates on

Time Deposits and Savings Accounts:

Macro Factors, Bank Risk, and

Account Features*

JACOB A. BIKKER

†,‡

AND DIRK F. GERRITSEN

‡

†

De Nederlandsche Bank, Supervisory Policy, Strategy Department, Amsterdam, The

Netherlands and

‡

Utrecht School of Economics, Utrecht University, Utrecht, The Netherlands

ABSTRACT

Using a novel dataset from the Netherlands’banking sector, we examine how

macroeconomic, bank-specific, and account-specific characteristics affect the

interest rates of banking products. Our results show that interest rates have

become more sensitive to bank risk since the onset of the global financial

crisis. More generally, we show that time deposits reflect more closely the

economic environment than bank interest rates on savings accounts do.

Interest rates on deposit products vary not only across, but also within banks

(i.e., across account of individual banks). We find that maturity-increasing

conditions (i.e., withdrawal fees for savings accounts and product maturity

for time deposits) positively influence a product’s interest rate.

JEL Codes: G21

Accepted: 22 June 2017

I. INTRODUCTION

We study the determinants of interest rates on both savings accounts and time

deposits in the Netherlands during the period 2003–2014.

1

Time deposits have

afixed maturity, usually preventing early withdrawal of the deposited funds.

The interest rate conditions on these deposits are communicated to depositors

in advance. By contrast, savings accounts can be accessed at all times, and

* We are grateful to Spaarinformatie for the savings and deposit interest rate data, Steffie Schwillens

for her crucial contribution in the earlier stage of this research, Martien Lamers for useful comments,

Jack Bekooij for excellent research assistance, and an anonymous referee for providing outstanding

suggestions.

1 According to the DNB Household Survey 2014, 78% of Dutch individuals have one or more

savings or deposit accounts. The overwhelming majority of current accounts in the

Netherlands are non-interest bearing accounts.

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial License, which permits use,

distribution and reproduction in any medium, provided the original work is properly cited and is not used for commercial

purposes.

© 2017 The Authors International Review of Finance published by John Wiley & Sons Australia,

Ltd on behalf of International Review of Finance Ltd. 2017

International Review of Finance, 2017

DOI: 10.1111/irfi.12143

International Review of Finance, 18:2, 2018: pp. 169–216

DOI:10.1111/irfi .12143

generally come with a floating interest rate. Both types of accounts can be used by

bank customers to deposit funds and earn interest. In order to study deposit rate de-

terminants, we employ a unique dataset, which consists of rates and conditions

on a daily basis offered by all commercial banks active in the Netherlands.

Figure 1 depicts the highest, lowest, and median interest rates offered on

Dutch savings accounts during these years. In most years, the highest interest

rate was approximately 1.5% points above the median rate. During the height

of the financial crisis, the gap widened to no less than 2.5% points. Our study

aims to gain a better understanding of the developments of deposit rates in

general, and of the impact of a financial crisis on these developments in par-

ticular. Our analysis focuses on a wide range of factors representing macroeco-

nomic, bank-specific, and account-specific variables.

The extent to which deposit rates reflect macroeconomic variables is studied

by, among others, Kok Sørensen and Werner (2006), De Graeve et al. (2007),

Gambacorta (2008), and Antao (2009). In general, it is found that the market

rate, inflation rate, and volatility of both the market rate and the stock market

all exert a positive impact on bank rates. By contrast, economic growth and the

level of bank concentration are negatively related to interest rates. Both De

Graeve et al. (2007) and Kok Sørensen and Werner (2006) make a distinction

between short-term and long-term deposit products. We follow them by sepa-

rately studying savings accounts and time deposits.

The impact of bank-specific variables on the price of deposits is generally

studied in the market discipline literature. Market discipline refers to the process

in which debtholders, such as depositors, require higher returns when the

probability increases that they incur losses in case of, for example, a bank default.

In general, bank risk and the deposit rate are positively related (e.g., Park and

Peristiani 1998; Mondschean and Opiela 1999; Martinez Peria and Schmukler

2001; Demirgüç-Kunt and Huizinga 2004; Imai 2006; Murata and Hori 2006;

Figure 1 The interest rate on savings accounts in the Netherlands, 2003–2014.

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Hori et al. 2009; Beyhaghi et al. 2014), despite the fact that deposit insurance

weakens this relation (e.g., Mondschean and Opiela 1999; Demirgüç-Kunt and

Huizinga 2004).

2

Lastly, Johnson et al. (2008) acknowledge the effect of account-specific

variables on interest rates. They show that rates generally increase with the

maturity of the deposit. By contrast, bank savings accounts are usually treated

by the literature as one single entity, while in reality banks offer different savings

accounts with different characteristics. For example, an account can come with a

minimum balance, a withdrawal fee, or a bonus rate for rewarding loyal

customers.

In addition to examining the pricing of macroeconomic, bank-specific and

account-specific variables in savings account and time deposit interest rates, we

specifically study whether the impact of these variables changed during the

financial crisis. To the best of our knowledge, the impact of bank risk on deposit

rates during the recent financial crisis is only studied by Beyhaghi et al. (2014).

3

They study Canadian banks and find for this period that bank-specific risk

factors lose their importance in explaining deposit rates, which they attribute

to a greater market awareness of government guarantees for potentially failing

banks. These results cannot be generalized to other countries per se, because

Canada “has no history of government bailouts”(Beyhaghi et al. 2014: 396)

and did not experience a bank failure during the 2007–2009 period. Stolz and

Wedow (2010) document government support measures in the USA and the

EU countries and show that the financial sector in most countries is less robust

than in Canada, possibly leading to greater concerns among depositors. In

2008, depositors in the Netherlands were confronted with the nationalization

of both the Belgian–Dutch Fortis bank (which had acquired one of the largest

banks of the Netherlands ABN Amro only one year earlier) and the Iceland-

based Landsbanki, which operated in the Dutch market under the Icesave

brand. In addition, ING received a capital injection by the Dutch government

in 2008. Fortis-ABN Amro and ING were two of the three largest banks in the

Netherlands in 2008, the other one being the Rabobank. Icesave was a smaller

online savings bank targeting retail clients. Another relatively small bank, DSB

Bank, failed in 2009, and the fourth largest bank SNS Reaal was nationalized

in 2013. The Dutch market can therefore be regarded as a different setting than

that in the work of Beyhaghi et al. (2014) as depositors have been confronted

2 Demirgüç-Kunt and Huizinga (2004) find that this type of insurance leads to a perception

among depositors that deposits are safer, resulting in a lower required deposit rate.

Mondschean and Opiela (1999) conclude for the Polish market that the relation between de-

posit rates and bank characteristics diminished after the introduction of deposit insurance.

In contrast, Park and Peristiani (1998) illustrated for US thrifts that riskier institutions had to

pay a higher interest rate, despite the fact that the deposits were insured.

3 We acknowledge the paper by Berger and Turk-Ariss (2015); however, they focused on deposit

amounts rather than the deposit rate.

Determinants of Deposit Interest Rates

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Ltd on behalf of International Review of Finance Ltd. 2017

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Determinants of Deposit Interest Rates

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Ltd on behalf of International Review of Finance Ltd. 2017