Diverging Paths in Banks' Business Models: New Facts and Macro Implications

We document the emergence of two distinct types of banks over the past decade: high rate banks which provide deposit rates in line with market interest rates, and low rate banks whose deposits are now even less sensitive to market rates. While the aggregate sensitivity of deposit rates to market interest rates has remained similar, the distribution in deposit rates among large banks is now bimodal. High rate banks operate primarily online with very few physical branches, hold short maturity assets, and earn a lending spread by taking credit risk. In contrast, low rate banks operate far more physical branches, offer deposit rates that are even less sensitive to interest rates than before, and they primarily engage in maturity transformation in that they hold longer duration interest rate sensitive assets, but take less credit risk. Deposits shift substantially towards high rate banks when interest rates rise and reduce the ability of the banking sector to engage in maturity transformation. Tracking aggregate deposit flows from the banking sector thus misses a substantial amount of flows within the banking sector. We argue that the distribution of deposits across high and low rate banks is important to understand the transmission of monetary policy, beyond tracking aggregate deposits in the banking sector. Our evidence is consistent with technological changes in banking that lead to the emergence of high rate banks. In response, traditional banks lower rates through the retention of "stickier" depositors.