by Stephen Kho
In response to swift policy rate hikes by the ECB, commercial bank deposit rates have increased but also diverged across the euro area. In this SUERF policy brief, I discuss the transmission of monetary policy to deposit rates in the euro area, with a focus on the role of concentration in the banking sector. Provided that banks in a more concentrated banking sector hold greater market power, market concentration may explain some of the variance seen in deposit rates across countries. Using country-level and bank-level data for euro area member states, I show that more concentrated banking sectors indeed pass-on unexpected monetary tightening more slowly than their less concentrated counterparts, while they do pass-on unexpected monetary easing more quickly. Heterogeneity in the degree of concentration could thus contribute to heterogeneity in the transmission of monetary policy to deposit rates, at least temporarily.