- Abstract
I study the transmission of monetary policy to deposit rates in the euro area with a
focus on asymmetries and the role of banking sector concentration.
- Moreover, the
gap between deposit rates across euro area member states - despite being exposed to the same
key ECB interest rates - has widened.
- This begs the question whether deposit rates are more
sluggish in response to both policy rate increases and cuts, and what factors might influence the
transmission of monetary policy to deposit rates.
- Whether banks are indeed able to adjust deposit rates asymmetrically to positive and
negative changes in policy rates could thus well depend on how much market power they hold
in the deposit market.
- Arguing that market power increases in the degree of market concentration,
I further consider whether more concentrated banking sectors set rates (more) asymmetrically.
- The response of deposit rates in banking sectors with an average degree of concentration does
not appear asymmetric.
- The degree of market concentration is often pointed at, but recent evidence
for the euro area is scarce.
- In this paper, I provide empirical evidence on the asymmetric response of deposit rates to
monetary policy, and relate this to the degree of concentration within a country?s banking sector.
- Both papers
provide empirical evidence based on US deposit markets showing that deposit rates respond
more rigidly to upward changes in market rates than downward changes, especially so in more
concentrated markets.
- Recent research on euro area deposit markets,
instead, has focused more on the transmission of negative policy rates (see e.g.
- Whether banks are able to set deposit rates that materially differ from policy rates is affected
ECB Working Paper Series No 2896
4
by market concentration: market power is assumed to increase in the degree of concentration in
the banking sector.
- Concentration thus appears to matter for how quickly ECB monetary policy has
been transmitted to deposit rates across the euro area.
- Banks thus have a motive to be
rigid in adjusting deposit rates to a ?positive? monetary policy shock.
- While customers are generally (and potentially rationally) inattentive, swift and substantial
nominal deposit rate declines may trigger deposit outflows.
- relative deposit rate = deposit rate - short term rate
The inverse of the wedge, the relative deposit rate will allow us to see more clearly how
the deposit rate evolves in comparison to the short-term rate.
- This then translates to (more
pronounced) effects on the transmission of policy to the deposit wedge, reinforcing the asymmetry discussed before.
- More concentration would mean more rigid deposit rates (and thus an
increase in the deposit wedge) in case of positive surprises, and more flexible deposit rates (and
thus a decrease in the deposit wedge) in case of negative surprises (see also e.g.
- I add an identical
altered-linex adjustment cost for deposit rates, to capture the upward rigidity and downward
flexibility of deposit rates as well.
- As discussed
previously, the deposit rate is particularly rigid in case of a positive shock, illustrating the dividend smoothing motive and bank market power.
- Without the asymmetric adjustment cost,
the response of the deposit rates to positive and negative changes in policy would have been
symmetric.
- This appears a reasonable assumption
in general, as market concentration or market shares are slow-moving concepts.
- 3
Methods and data
I study the dynamic response to an unexpected change in monetary policy on deposit rates
in different countries in the euro area.
- deposit rate - short-term rate), which for the sake of
brevity I will refer to as the ?relative deposit rate?.
- Positive IRFs for the relative deposit rate imply that
the deposit rate has increased by more than the short-term rate, narrowing the wedge between
the short-term rate and the deposit rate.
- 0
?2
?2
?4
?6
?4
4
8
12
4
Months
8
12
Months
Figure 9: NFC rate response - linear combination of ?0 and ?1
Relative deposit rate at 1 month
Relative deposit rate at 4 months
0.0
0
?1
p.p.
- 0
0
?2
?1
?4
4
8
12
4
8
Months
12
Months
Figure 12: NFC rate response - linear combination of ?0 and ?1
Relative deposit rate at 1 month
Relative deposit rate at 4 months
2.0
1.5
p.p.
- And, (2) how quickly
households and NFCs learn about changes in monetary policy, via the deposit rate, may vary
across the monetary union.
- ?0 , ?1 )
Figure A16: NFC overnight deposits, small member states
Relative deposit rate (average)
Relative deposit rate (interaction)
2
10
5
p.p.
- ?0 , ?1 )
Figure A19: NFC overnight deposits, four lags
Relative deposit rate (average)
Relative deposit rate (interaction)
5
0
p.p.
- ?0 , ?1 )
Figure A28: NFC overnight deposits, small member states
Relative deposit rate (average)
Relative deposit rate (interaction)
3
5.0
2
2.5
p.p.
- ?0 , ?1 )
Figure A31: NFC overnight deposits, four lags
Relative deposit rate (average)
Relative deposit rate (interaction)
3
2
p.p.
