Deposit funding, market power and monetary policy transmission

Simone Auer (), Antonio Conti () and Paolo Farroni ()
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Simone Auer: Bank of Italy
Paolo Farroni: Bank of Italy

No 1533, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This paper examines the role of banks' deposit funding and deposit market power as potential drivers of the intensity of the pass-through from monetary policy to bank funding costs and broader financing conditions. We document that during the ECB's unprecedentedly forceful monetary tightening cycle in 2022-23, the pass-through from policy rates to overnight deposit rates was extremely muted compared with historical regularities, highlighting a disconnect in monetary policy transmission. Using confidential bank-level data, state-dependent panel local projections and high-frequency monetary policy shocks, we find that higher deposit funding is associated with a lower pass-through to overnight deposit rates, mainly in the short term. The dampening effect of deposit market power is more persistent and extends to lending rates for households and non-financial corporations.

Keywords: ECB; monetary policy; deposit rates; pass-through; Bayesian VAR models; state-dependent panel IV local projections (search for similar items in EconPapers)
JEL-codes: C32 E51 E52 E58 (search for similar items in EconPapers)
Date: 2026-04
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1533_26

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