Uniform Rate Setting and the Deposit Channel

Banks do not completely pass-through changes in short-term market rates to depositors. The deposit channel of monetary policy proposes that banks choose the rate of pass-through across their branches based on local deposit market concentration, which consequently affects bank deposit and loan growth. We document the widespread use of uniform deposit rate setting policies by US commercial banks and the nearly universal use of these policies by the largest banks. By definition, uniform rate setting policies ignore local market concentration and therefore the deposit channel cannot operate in these branches. We demonstrate that the early empirical evidence supporting the deposit channel requires excluding branches that are part of centralized rate setting networks, representing 85% of all commercial bank branches. Consistent with varying local demand conditions causing the empirical relationships in branch level deposit growth predicted by the deposit channel, we find that these empirical relationships are equally reliable in the set of "rate network" branches as in the full sample of branches, despite the deposit channel being inoperable among network branches. Additionally, we show that several reliable relationships in the cross section of banks do not aggregate because of the extreme bank size distribution and the differential behavior of small and large banks.