Publications:
Large Retail Time Deposits and U.S. Treasury Securities (1986-95):
Evidence of a Segmenting Market
by James H. Gilkeson and Gary E. Porter
OCC Working Paper 97-12, July 1997.
Abstract
Although investors face an ever-growing menu of securities with divergent cash flows and risk
patterns, some continue to place funds in fixed-rate, fixed-maturity, default-risk-free
instruments, primarily U.S. Treasury securities and FDIC-insured time deposits. Given free,
easy access to noncompetitive bids in the primary Treasury market by means of the Treasury
Direct program, investors could plausibly view Treasury securities and large retail time
deposits (up to $100,000) as very close substitutes, and demand equal pricing. We test this
hypothesis using weekly series of Treasury and large retail time deposit yields for three
maturities over a 10-year period (1986-95). The data reveal a pattern of equilibrium pricing
between 1986 and 1990. However, the data also show that large retail time deposits were
routinely underpriced relative to Treasuries from mid-1990 onward. We conclude that the
change in the pricing of large retail time deposits reflects increasing market segmentation.
That is, the flight from insured balances into money market funds and other uninsured
investments has left banks with a group of investors who are uncommonly insensitive to
interest rates or, equivalently, have the highest switching costs. In addition, we find that
increases in and persistence of the negative spread beginning in 1990 had no measurable effect
on changes in aggregate time deposit balances and that average large time deposit yields
exhibit stickiness relative to those of U.S. Treasuries. This suggests that banks are able to
extract available surplus from the depositor segment of the risk-free debt investors. This
surplus helps to make up for the loss of the banks' more rate-sensitive investors.
Disclaimer
As with all OCC Working Papers, the opinions expressed in this paper are those of the author
alone, and do not necessarily reflect the views of the Office of the Comptroller of the Currency or
the Department of the Treasury.
Any whole or partial reproduction of material in this paper should include the following citation:
Gilkeson and Porter, "Large Retail Time Deposits and U.S. Treasury Securities (1986-95):
Evidence of a Segmenting Market," Office of the Comptroller of
the Currency, E&PA Working Paper 97-12, July 1997.
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