Deposit market concentration and monetary transmission: evidence from the euro area
Gepubliceerd: 24 augustus 2023
Door: Stephen Kho
I study the transmission of monetary policy to deposit rates in the euro area with a focus on the role of banking sector concentration. Using a local projections framework with 2003-2022 country-level and bank-level data for thirteen euro area member states, I find that deposit rates respond symmetrically to unexpected changes in monetary policy. However, more concentrated domestic banking sectors do pass on unexpected monetary tightening (easing) more slowly (quickly) than less concentrated banking sectors, which contributes to a temporary divergence of deposit rates across the euro area. These results suggest that heterogeneity in the degree of banking sector concentration matters for the transmission of monetary policy, which in turn may affect banking sector profitability as well as the macro-economic response to monetary policy.
Keywords: Monetary transmission; deposit rates; market concentration
JEL codes E43; E52; D40
Working paper no. 790
790 - Deposit market concentration and monetary transmission: evidence from the euro area
Research highlights
- I study whether banking sector concentration affects the transmission of monetary policy to deposit rates in the euro area, using 2003-2022 country-level and bank-level data and a panel local projections framework.
- I find that more concentrated banking sectors increase deposit rates more slowly than the average sector when monetary policy is unexpectedly tightened, while they decrease deposit rates faster than average when policy is unexpectedly loosened.
- The divergence in deposit rates between the most and least concentrated banking sector in the euro area, in response to a 100 basis point shock, could reach up to about 180 bps. Put another way, the pass-through of policy in more concentrated sectors could be thought of as slower (on the way up) or faster (on the way down) by a few months, compared to the average banking sector.
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