More competitive banks transmit policy better through deposit rates
More competitive euro area banks pass policy rate changes through more strongly to household deposits, European Central Bank (ECB) research finds. Cost efficiency supports competitiveness, while lower capital requirements show no statistically significant effect.
Depositors receive stronger pass-through
Euro area bank valuations and profitability have improved as balance sheets recovered and intermediation margins widened, narrowing the valuation gap with US peers since 2023.
More competitive banks relied less on government-guaranteed lending and targeted longer-term refinancing operations during the 2020-2021 pandemic shock and transmitted stimulus more effectively.
Deposit-rate evidence through March 2026 shows stronger pass-through for households; corporate differences are less clear because confidence bands overlap.
Lending-rate pass-through does not depend on competitiveness.
Cost-efficiency gains have persistent positive effects on competitiveness, while the estimated effect of lower capital requirements is not statistically significant.
Efficiency gains meet fragmentation
Banks have cut expenses by simplifying group structures, closing branches and reducing staff as online banking expanded.
Almost half of executives' references to artificial intelligence adoption concern future cost savings.
Greater geographical reach is associated with lower cost-to-income ratios in evidence covering 1,034 banks.
The ECB identifies completing the savings and investments union and cross-border consolidation as routes to efficiency gains.
Past mergers improved operating efficiency, balance sheet health and sectoral diversification.
Competitiveness is not market power
The ECB distinguishes sustainable bank profitability from profits earned through market power.
Mergers increase market shares and can weaken local competition and monetary transmission.
Cross-border integration offers a counterweight through diversified banks that sustain credit across policy cycles.