Deposits and the transmission of monetary policy

Deposits and the transmission of monetary policy

Bank deposits

Fecha: mayo 2024

David Marques-Ibañez, Alessio Reghezza, Carmelo Salleo and Giuseppe Cappelletti

SEFO, Spanish and International Economic & Financial Outlook, V. 13 N.º3 (May 2024)

Bank deposits have been shown to play a role in shaping monetary policy and access to credit. This mechanism could be far more pronounced as interest rates experience large and unexpected hikes, and even stronger after a long period of low interest rates. The reasons are twofold: First, at low rates, many banks aimed to extract the maximum value from their deposits franchise by taking interest rate risk and increasing their duration gap. This would mean that many banks would enter the rate hike period with a large duration gap so deposit withdrawals would render their duration gap more pronounced. Second, higher increases in rates would make the stability of “cheap” deposit funding more uncertain as depositors consider alternative sources of funding. Research shows that in euro area countries, banks experiencing deposit outflows choose to reduce credit rather than increase the interest rate they charge. Crucially, firms entering the tightening cycle mostly connected to lenders with higher duration gaps could be significantly less likely to obtain credit as tightening starts, with the likelihood becoming even lower for banks experiencing deposit outflows. More broadly, this phenomenon relates to concerns about financial stability from central banks’ tightening their stance after a long period of ample liquidity and balance sheet expansion.

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