Determinants of Interest Rates on Time Deposits and Savings Accounts: Macro Factors, Bank Risk, and Account Features

Abstract

Using a novel dataset from the Netherlands' banking sector, we examine how macroeconomic, bank-specific, and account-specific characteristics affect the interest rates of banking products. Our results show that interest rates have become more sensitive to bank risk since the onset of the global financial crisis. More generally, we show that time deposits reflect more closely the economic environment than bank interest rates on savings accounts do. Interest rates on deposit products vary not only across, but also within banks (i.e., across account of individual banks). We find that maturity-increasing conditions (i.e., withdrawal fees for savings accounts and product maturity for time deposits) positively influence a product's interest rate.

The Determinants the Rate of Return on Deposits in Islamic Banks

“…Concentration, as projected, correlated negatively and significantly with the rate of return on deposits (p < 0.01), which supports the structureconduct-performance hypothesis. This result confirms Hamza (2016) and Bikker and Gerritsen's (2017) findings. Conversely, the result of this variable contradicts the deductions of Meslier et al (2017) for Islamic banks but ratifies their findings for conventional banks.…”

“…In terms of external variables, economic growth, as expected, negatively and significantly (level of 1%) affected RROD. The studies of Hamza (2016), Bikker and Gerritsen (2017), and Meslier et al (2017) align with these findings. The negative sign could be attributed to the fact that during economic growth banks take higher risks, leading to lower profitability and a poorer rate of return.…”

“…The final bank variable size is closely correlated with the rate of return on deposits (p < 0.01), suggesting that large banks operate efficiently (economies of scale) and have diversified portfolios, leading to higher rates of return. This result contradicts Hamza (2016) and Bikker and Gerritsen's (2017) findings but supports Meslier et al's (2017) study for both banking types.…”

“…This indicates that foreign capital reduces risk and they not affected by the economic conditions of the host country leading to a higher rate of return on deposits. Bikker & Gerritsen (2017) and Azam & Siddiqui (2012) results confirm these findings but contradict Hamza (2016). The final bank variable size is closely correlated with the rate of return on deposits (p < 0.01), suggesting that large banks operate efficiently (economies of scale) and have diversified portfolios, leading to higher rates of return.…”

Bank Switching and Interest Rates: Examining Annual Transfers Between Savings Accounts

“…We supplement the DHS data with detailed daily interest rate data on savings accounts provided by Spaarinformatie (see Bikker and Gerritsen 2018). Spaarinformatie is an independent organization that tracks the interest rates on retail savings accounts for all banks active in the Netherlands.…”