Interest rate dispersion in deposit and loan markets

Abstract

This paper investigates the existence and determinants of interest rates dispersion in loans and deposits of Spanish banks. A unique feature of the research is that it covers a whole industry (thirty products and two hundred banks) from 1989 to 2003. We find that: i) interest rates dispersion is a persistent phenomena in loans and deposits markets

ii) the differences across products in the observed dispersion can be explained as a function of variables that affect the private net benefits of consumers’ investment in information including search costs (frequency and volume of transactions)

iii) interest rate dispersion is more sensible to product specific inflation than to changes in the interest rate of the economy

iv) regulation of standards of transparency by the Spanish Central Bank has been effective in reducing interest rate dispersion. [resumen de autor]