The Rate Elasticity of Retail Deposits in the United Kingdom: A Macroeconomic Investigation

This paper quantitatively studies the behavior of major banks’ household deposit funding in the United Kingdom. We estimate a panel of Bayesian vector autoregression models on a unique data set compiled by the Bank of England, and identify deposit demand and supply shocks, both to individual banks and in aggregate, using microfounded sign restrictions. Based on the impulse responses, we estimate by how much banks would be required to increase their deposit rates to cover a deposit gap caused by funding shocks. Banks generally find it costly to bid up for deposits to cover a funding gap in the short run. The elasticity of household deposits with respect to the interest rate paid is typically of the order of 0.3, indicating that retail deposits are rate inelastic. But this varies across banks and the types of shock conditioned on. We also show evidence that banks are more vulnerable to deposit supply shocks than to deposit demand shocks. Historical decompositions uncover plausible shock dynamics in the historical data.