Poverty Spreads in Deposit Markets

This paper documents a source of financial inequality: banks offer significantly lower deposit interest rates and product variety to the poor. These poverty spreads in deposit markets are substantial - moving from the bottom to the top income decile increases deposit rates by 55% of the median rate in our sample. The spreads are not explained by banking competition for deposits or other products, but appear to be driven by banks internalizing differential participation in nondeposit markets across the income distribution. Consistent with this hypothesis, deposit flows in high-income areas are more responsive to stock market performance than in low-income areas, and quasiexogenous reductions in participation incentives through increases in capital gains taxes are associated with lower poverty spreads. Our findings highlight lack of participation as a substantial source of deposit market power, and suggest that increasing access may reduce poverty spreads and improve outcomes for low-income depositors.