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A Test of the Deposit Relationship Hypothesis

Published online by Cambridge University Press:  19 October 2009

Neil B. Murphy
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Extract

In a recent article, Donald R. Hodgman set forth a framework for analyzing commercial bank lending behavior which emphasized the relationship of customers to their banks as both depositors and borrowers. Specifically, Hodgman links the borrower's contract rate of interest to the profitability of his deposit account, i.e., banks compete for profitable deposit customers by offering the customer a rate which is lower than the comparable open market rate (adjusted for risk). Hodgman uses the terms deposit relationship and customer relationship to describe this behavior. He argues that compensating balance requirements, the prime rate convention, and provision of services below cost may be viewed as a systematic, rational attempt by commercial banks to maximize long-run profit under existing institutional arrangements when viewed from the perspective of the customer relationship.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 2 , Issue 1 , March 1967 , pp. 53 - 59
Copyright
Copyright © School of Business Administration, University of Washington 1967

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References

1 Hodgman, Donald R., “The Deposit Relationship and Commercial Bank Investment Behavior,” Review of Economics and Statistics, XLIII (August 1961), pp. 257–268.CrossRefGoogle Scholar

2 In his Commercial Bank Loan and Investment Policy (Urbana: Bureau of Economic and Business Research, University of Illinois, 1963Google Scholar), Chapters 9–12, Hodgman has a more comprehensive treatment of this concept.

3 Davis, R. G. and Guttentag, J. M., “Balance Requirements and Deposit Competition,” Journal of Political Economy, LXXI (December 1963), pp. 581–585.CrossRefGoogle Scholar

4 Ibid., pp. 582–83.

5 D. R. Hodgman, op. cit., pp. 165–68.

6 See Murphy, N., “Cash Management in State and Local Government,” New England Business Review, June 1966.Google Scholar

7 For a more comprehensive discussion of the quality of Massachusetts town revenue anticipation notes, see Bennink, Richard E., “Temporary Loans to Massachusetts Municipalities in Anticipation of Revenue,” Unpublished Thesis, Stonier School of Banking, Rutgers University, June 1953, pp. 10–15.Google Scholar

8 Advisory Section of the Government Bond Division, Morgan Guaranty Trust Company of New York, “Domestic Money Market Run-Down,” published weekly. Actually this rate is an offer rate (price) and is generally below (above) the bid rate (price). For a more complete discussion of the series and the market, see Morgan Guaranty Trust Company of New York, Money-Market Investments The Risk and the Return, 1964.

9 The survey requested that the treasurer supply this information for the note issue closest to August 1, 1965. The responses ranged from 15 days prior to that date to 10 days after. The sample is treated as a cross-section.

10 After certification by the Bureau of Accounts of the Commonwealth's Department of Corporations and Taxation, the treasurer notifies by telephone those banks which have previously expressed an interest in bidding. Bids are then mailed to the treasurer.