contrast to what the possibility of accessing foreign markets could suggest. The
reasonability of this explanation is enhanced by the fact that the apparent larger
dependence of deposits disappears in the model of column (6), which accounts for
liquidity effect37.
But, of course, the fact that the estimated α1 is positive may alternatively be seen as
a sign that we are not being able of correctly modelling the structural break occurred in
last two years of the sample. From this point of view there are also some reasons that
could be invoked to explain why it might also be the case that the estimated equations are
not adequately capturing the entire relevant characteristics of the data. One major
limitation of our approach regards the theoretical model behind our estimated equation. As
we have seen, underlying our estimated equation is the assumption that banks cannot
control deposits and capital (in the sense that these are not decision variables of the banks
when they maximise profits) but are able to control the amount of external funds (other
than deposits and capital). How realistic this assumption is in the Portuguese case is an
open issue. Of course deposits are not completely controlled by banks, but they do not
seem to be completely exogenous either38. At least in the medium or long run it seems
reasonable to argue that banks may be able to influence the amount of their own deposits.
The same argument applies to capital as it includes non-distributed profits. So, treating
deposits and capital as totally exogenous, as we did, is probably an oversimplification. We
note, however that our approach is still valid even if deposits are endogenous, but then we
37 Also, if we include the liquidity variable as an additional regressor in the model of column (8) of
Table 6 to account for the structural break it turns out that the coefficients of lt d96 and std96 become clearly
non significant (the t statistics drops to 0.17 and -0.01, respectively) and the coefficient of ln(D / P)d96 even
tough still remaining significantly different from zero, its point estimate as well as its t-statistics also decrease
(to 0.054 and 3.23, respectively). This result highlights two important aspects: i) the inclusion of the liquidity
ratio as an independent variable in the model of column (8) accounts for most of the detected structural break
and ii) the fact that the coefficient of ln(D / P)zit still remains significant is an important piece of evidence
that capitalisation in the model is not simply proxying the structural break, but rather explaining bank
behaviour.
38 If deposits were completely controlled by banks, the central bank would no longer be able to control
the aggregate deposits and so, there would not be any lending channel at the aggregate level. In a theoretical
model of the lending channel, Stein (1998) allows interbank competition for deposits, but clearly assumes that
the central bank can control the bank reserves. It is not clear how these two assumptions may be reconciled at
an aggregate level. It seems to us that if one assumes that the central bank can control the aggregate amount of
deposits, then banks can only be allowed to compete for a “market share” of deposits. But in this case the
obvious adding up restriction must be taken into account.
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