Abstract
Inflation of the U.S. dollar drove the Federal Reserve Board to enact four interest rate hikes of 0.75% and additional smaller hikes between March 2022 and April 2023. This paper examines how interest rate hikes affect bank deposit betas and credit risk for community banks, hot money banks, and alternative lending institutions based on data from March 2022 to April 2023. After analyzing data from the Federal Reserve Economic Database, this research found that bank deposit betas increase as interest rates rise, that community banks’ betas increase at a slower rate than hot money banks’ betas, and that the level of borrower risk is higher in financial technology (fintech) platforms compared to traditional banks. These findings are relevant to regulators and policymakers because fintech defaults could impact traditional banks, necessitating that the Federal Deposit Insurance Corporation and other financial regulators monitor the effects of rising interest rates on the banking industry to avoid a run on banks.
Recommended Citation
Craig, A., Grose, J., Tersoglio, J., Vanhoy, N., & Vivenzio, B. (2024). The impact of rising interest rates, bank deposit betas, and credit risk. James Madison Undergraduate Research Journal 11(1): 49–58. http://commons. lib.jmu.edu/jmurj/vol11/iss1/5/
Included in
Business Analytics Commons, Business and Corporate Communications Commons, Finance and Financial Management Commons
