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Deposit funding, market power and monetary policy transmission

Author

Listed:
  • Simone Auer

    (Bank of Italy)

  • Antonio Maria Conti

    (Bank of Italy)

  • Paolo Farroni

    (Bank of Italy)

Abstract

This paper examines the role of banks' deposit funding and deposit market power as potential drivers of the intensity of the pass-through from monetary policy to bank funding costs and broader financing conditions. We document that during the ECB's unprecedentedly forceful monetary tightening cycle in 2022-23, the pass-through from policy rates to overnight deposit rates was extremely muted compared with historical regularities, highlighting a disconnect in monetary policy transmission. Using confidential bank-level data, state-dependent panel local projections and high-frequency monetary policy shocks, we find that higher deposit funding is associated with a lower pass-through to overnight deposit rates, mainly in the short term. The dampening effect of deposit market power is more persistent and extends to lending rates for households and non-financial corporations.

Suggested Citation

  • Simone Auer & Antonio Maria Conti & Paolo Farroni, 2026. "Deposit funding, market power and monetary policy transmission," Temi di discussione (Economic working papers) 1533, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1533_26
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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2026/2026-1533/en_tema_1533.pdf
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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