Local Power, Global Reach: The Influence of Deposit Market Power on International Banking

Abstract

We provide evidence that the market power that global banks hold over domestic US deposits drives their operations abroad. After a contractionary monetary shock, global banks with high local deposit market power increase bank deposit spreads and experience outflows of domestic deposits. Since global banks have assets abroad, they increase flows from foreign branches to finance domestic lending but reduce lending abroad, thus cutting domestic lending less than local banks: a 1 p.p. US monetary shock leads to $180 billion in flows from foreign branches to US offices. Our results demonstrate that the local deposit market power of global banks has significant repercussions on their international operations.

Presented at: Midwest Finance Association, OCC Symposium on Systemic Risk*, Wharton-INSEAD Doctoral Consortium, Financial Markets and Corporate Governance Conference, Sveriges Riksbank PhD Workshop in Money and Finance, Trans-Atlantic Doctoral Conference, Asian Finance Association*, Northern Finance Association (scheduled)*

*denotes presentation by co-author

Sergey Sarkisyan

Assistant Professor of Finance

My research interests include financial intermediation, monetary policy, and payment technologies