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Interest rate pass-through to the rates of core deposits: A new perspective

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  • Sopp, Heiko

Abstract

Within a Salop framework, this paper shows that banks' profit smoothing can explain incomplete pass-through of market rates to the rates of core deposits. Using time series data of deposit and lending rates of local German banks, this paper will show that local banks pass through return variations to their depositors. To the degree to which market rates influence new business lending rates, there is, therefore, an indirect channel through which market rates affect the rate of core deposits. In the absence of capital market alternatives for core deposits, this indirect channel explains why changes in the market rate affect the rate of core deposits only slowly and fractionally.

Suggested Citation

  • Sopp, Heiko, 2018. "Interest rate pass-through to the rates of core deposits: A new perspective," Discussion Papers 25/2018, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdps:252018
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    3. Busch, Ramona & Memmel, Christoph, 2021. "Why are interest rates on bank deposits so low?," Discussion Papers 46/2021, Deutsche Bundesbank.

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    More about this item

    Keywords

    interest rate pass-through;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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