One strand in the recent academic literature seeks to explain the existence of different bank interest rates on loans and deposits on the basis of monopolistic competition in the banking sector. In this case, banks earn a positive profit margin because they can set the level of bank interest rates such that deposit rates are below the interbank rate and loan rates are above it. In addition, the bank faces costs in adjusting its interest rates and will take the pricing decision of competitors into account in order to preserve long-term customer relationships. This shields borrowers from market rate fluctuations. 2 .
