Interest rate clustering: empirical evidence

Abstract

The convention of price clustering can be commonly found in many different commodities including banking products. This paper examines how banking market competition affects the clustering of lending rates and deposit rates. To test the clustering effects, we develop a clustering index and conduct several empirical analyses. We find that the level of clustering differs by product types in a given local market. Interest rate clustering is less severe in the banking products which are traded by more sophisticated consumers. We also show that both lending rates and deposit rates tend to cluster more as the local banking market became more concentrated. Our results broadly suggest that interest rate clustering can be driven not only by the limited recall phenomenon but also by tacit collusion among competing banks in the local market. Finally, we find that clustering intensity generally decreases over time in MMA markets.