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Financial Sophistication and Bank Market Power

Author

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  • Matthias Fleckenstein
  • Francis A. Longstaff

Abstract

We study the relation between bank funding costs and the financial sophistication of bank customers. In doing this, we make use of a natural experiment that allows us to identify banks that—either intentionally or unintentionally—price time deposits in a way that can result in financially-unsophisticated customers essentially being shortchanged. We find that these banks have significantly lower deposit funding costs. These results provide evidence that having financially-unsophisticated customers may provide banks with substantial market power and be an important component of the value of a bank's deposit franchise.

Suggested Citation

  • Matthias Fleckenstein & Francis A. Longstaff, 2024. "Financial Sophistication and Bank Market Power," NBER Working Papers 33049, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33049
    Note: AP
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    More about this item

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • G53 - Financial Economics - - Household Finance - - - Financial Literacy

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