The anatomy of transmission: pass-through of market rates to bank deposit rates in the euro area

This paper investigates the pass-through of market rates to bank deposit rates in the euro area, using bank-level data from July 2007 to March 2025. We employ local projections and an errorcorrection model to analyze the dynamics of pass-through over time, across interest rate regimes, and among countries, as well as explore its potential drivers. The results show that pass-through is significant but uneven. It is stronger for term and corporate deposits than for demand and household deposits. The effectiveness of pass-through diminishes in a lowinterest- rate environment and varies across countries. Structural features of the banking sector and bank balance sheet characteristics also shape transmission. Specifically, banks operating in more concentrated markets exhibit lower pass-through. In addition, banks with larger liquidity buffers, stronger capitalization, and greater reliance on deposit funding adjust deposit rates less. Lastly, higher customer switching frequency and higher payment account fees are associated with stronger pass-through for household demand deposits.

Keywords: deposit rates; market rates; pass-through; euro area; zero lower bound; bank competition
JEL codes G21; G10; E43; E52

Working paper no. 865