Bond funding and fixed loan rates dampen policy rate pass-through
Euro area banks relying on bond issuance and fixed-rate lending adjust corporate loan rates significantly more slowly to policy rate shifts than money-market-dependent lenders, according to an ECB working paper covering 266 institutions from 2007 to 2023.
Money markets transmit, bonds insulate
Aggregate corporate lending rates in the euro area absorb 40 percent of a policy rate shock on impact and 80 percent within three months, while overnight deposit pass-through remains below 20 percent.
Granular balance-sheet data from 266 banks across 2007 to 2023 reveals substantial cross-sectional dispersion behind these averages.
Lenders heavily reliant on short-term money market borrowing face immediate refinancing cost increases and promptly raise corporate loan rates.
In contrast, institutions funded primarily through long-term debt securities remain insulated from short-rate shocks.
When high bond issuance coincides with corporate loan portfolios fixed for over five years, lending rate adjustments are the most subdued across the entire banking sector.
The macroeconomic cost of friction
Wholesale funding accounts for up to 38 percent of euro area bank balance sheets, making market liabilities the active pricing margin over sticky retail deposits.
Calibrating a New Keynesian model with empirical bank-rate frictions demonstrates that assuming complete pass-through overstates monetary policy impacts by approximately one percentage point for output and two basis points for inflation.
Asset-liability matching naturally stabilizes revenue and funding costs simultaneously.
Balance sheets over geography
The study convincingly demonstrates that bank balance sheet structures matter more for transmission than traditional country-level fragmentation.
However, omitting unconventional liquidity tools and state-dependent rate regimes leaves a noticeable empirical blind spot.
Central banks must nonetheless incorporate liability maturity into transmission models.