A Banks International Loan Policy And The Supply of Deposits

Abstract

If the supply of domestic deposits is a function of the rate on deposits and the amount of loans extended domestically, and if domestic banks maximize profits, then the interest rate differential between two countries persists despite the lack of risk or government intervention. Furthermore, each domestic bank holds a combination of domestic and foreign loans although rates abroad are higher. By extending domestic loans, the bank attracts more deposits and incurs lower interest costs on these deposits.