Depositor shifts boost bank market power, curb rate pass-through

A new ECB working paper investigates the supply and demand drivers of bank deposit pricing in the euro area from 2007 to 2024.

The study documents that the pass-through of policy rates to sight deposit rates is low, asymmetric, varies across monetary policy regimes, and has decreased over time.

Rate-sensitive depositors, primarily higher-income households and firms, increasingly shifted to alternative, higher-yielding savings products.

This compositional shift reduced the average rate-sensitivity of the remaining pool of sight deposits.

Consequently, banks' market power over sight deposits increased, accounting for the sluggish rise in overnight deposit rates following the European Central Bank's policy rate hikes starting in 2022.

The long-run deposit beta for household sight deposits is estimated at 0.247, significantly lower than the 0.3 observed during the 2007–2008 hiking cycle and approximately 0.1 during 2022–2024.

The pass-through is also higher when the ECB decreases policy rates.

These findings have several important implications for monetary policy transmission.

The effectiveness of the deposit channel depends not only on current policy rates but also on their recent history, as policy normalization after extended low rates triggers a compositional shift that weakens pass-through.

For financial regulation and competition policy, the limited explanatory power of bank-specific characteristics suggests that interventions solely focused on market structure may have modest effects.

Instead, policies improving depositors' financial literacy or awareness of alternative products could alter the depositor base and contribute to higher deposit rates.

The analysis also points to financial stability concerns, as banks become increasingly reliant on a core group of inertial depositors whose behavior during financial stress is difficult to predict.