February 2024: SUERF Policy Brief – Deposit market concentration and monetary transmission: evidence from the euro area

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.

Links: SUERF Policy Brief, No 788 – Deposit market concentration and monetary transmission: evidence from the euro area