Poverty spreads in deposit markets

We document deposit rate spreads along the income distribution—moving from bottom to top income decile increases rates by 55% of the sample median. These spreads persist independent of banking competition. Instead, banks seem to internalize differential participation in nondeposit markets: only income components tied to participation explain deposit rate differentials, not salaries. Exploiting top earners’ state capital gains tax changes as quasi-experimental shocks to participation incentives, we establish a causal link between nondeposit market participation and deposit rates. Our findings reveal lack of participation in nondeposit markets as a source of deposit market power.