Informational differentiation, interest rate dispersion and market power¹

¹ This article is the sole responsibility of its authors and the views expressed here do not necessarily reflect those of the Banco de España.

Abstract

This article investigates the existence and determinants of interest rate dispersion in loans and deposits of Spanish banks under the lens of informational differentiation. We find that interest rate dispersion and market power co-vary in the same direction across bank products under differences in variables that affect customers' incentives to search.

Acknowledgements

We thank Rafael Repullo, Julio Segura and seminar participants at the CEMFI for helpful comments. Any remaining errors are entirely the authors' own responsibility.

Notes

² See, Salop and Stiglitz (1982), Stahl (1989), Benabou (1993), Fishman and Rob (1995), Hortacçu and Syverson (2004) and Hong and Shum (2006), among others.

¹ This article is the sole responsibility of its authors and the views expressed here do not necessarily reflect those of the Banco de España.

³ This contrasts, for instance, with Sorensen (2000) who studies drug price dispersion in pharmacies of two towns in a given moment of time and with Dahlby and West (1986), who study the determinants of price dispersion in a regional market for one automobile insurance product during 5 years.

⁴ Martin-Oliver et al. (2007) contains a detailed description of the database.

⁵ Current and savings accounts with zero or close to zero remuneration, are not reported by banks.

⁶ More specifically, the full list of products is, for LOANS, Receivables with a maturity of less than 3 months, 3 months to 1 year and 1 to 3 years; Credit Lines of less than 3 months, 3 months to 1year, 1 to 3 years and more than 3 years; Personal loans of less than 3 months, 3 months to 1year, 1 to 3 years and more than 3 years; Mortgages of more than 3 years; and Variable-interest rate loans of less than 1 month, 1 to 3 months and more than 3 months; and for DEPOSITS, Current accounts, Saving accounts, Repo operations of less than 3 months, 3 to 6 months, 6 months to 1 year and 1 year to 2 years; Deposits of less than 3 months, 3 to 6 months, 6 months to 1 year, 1 to 2 years and more than 2 years; Zero-coupon type deposits of less than 3 months, 3 to 6 months, 6 months to 1 year and 1 year to 2 years

⁷ The low volume products are receivables, personal loans, current accounts, saving accounts and variable loans with a maturity of less than 3 months (classification based on recorded loan and deposit data).