Digital banks show stronger, faster monetary policy transmission
A new ECB working paper finds that digital banks transmit monetary policy more strongly and rapidly than traditional banks, particularly during tightening cycles. The study, based on 170 digital banks in the euro area, highlights implications for both monetary and supervisory policy.
Faster funding channel, compressed margins
The study reveals that digital banks exhibit a stronger and faster funding channel during monetary policy tightening.
Specifically, household deposit rates at digital banks increased by approximately 15 basis points more per 100 basis point policy rate hike compared to traditional banks.
This led to significantly smaller compression in retail-funding spreads, particularly for overnight maturities and stand-alone digital institutions.
However, loan-rate pass-through was not correspondingly stronger; lending rates at digital banks moved broadly in line with their peers.
This asymmetry resulted in margin compression and a relative decline in profitability for digital banks during and after the tightening cycle, despite sustained inflows of household deposits.
Agile repricing, fading inflows in easing
Digital banks, while small on average, are growing rapidly and rely heavily on household deposits, predominantly overnight.
They also maintain larger cash buffers and intangibles compared to traditional banks.
During the initial easing phase, digital banks demonstrated a quicker adjustment, cutting new funding rates relatively fast, especially at longer maturities.
However, this agility also led to a softening of retail inflows, even as effective deposit premia persisted over traditional banks.
This competitive environment limits their ability to fully pass on higher funding costs to borrowers.
Intensified transmission, new stability risks
Digitalisation intensifies the funding cost channel of monetary policy, accelerating deposit competition and repricing.
This heightened sensitivity of retail deposits, particularly during sudden tightening, could facilitate a new type of bank run, posing financial stability concerns.
For digital banks, the trade-off between preserving retail inflows and maintaining margins when loan-rate pass-through is limited remains a key strategic challenge.