Bank loans and deposits react to interest rates, challenging traditional banking models.
The article explores how banks adjust their loans and deposits in response to changes in interest rates. The researchers created a model that considers the costs involved in making these adjustments. They found that the traditional idea of banks keeping loans and deposits separate doesn't match how banks actually behave. Instead, they discovered that banks respond to past, current, and expected interest rates when deciding on loans and deposits. This suggests that banks don't always keep their loan and deposit activities completely separate.