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Determinants of NMD Pass-Through Rates in Eurozone Countries

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  • Milan Fičura
  • Jiří Witzany

Abstract

Non-Maturing Deposit (NMD) pass-through rate represents a key parameter needed in the process of interest rate management of the banking book (IRRBB). NMD interest rates for retail and corporate segments are usually not directly linked to the market interest rates, but depend rather on the bank's marketing strategy, market competition, liquidity, and possibly on other factors. The ratio in which banks adjust their NMD interest rates to the changes of the interbank market interest rates is known as the NMD pass-through rate. The goal of this paper is to analyse the variability of NMD pass-through rates in the 19 Eurozone countries and identify their possible determinants. The pass-through rates are estimated using cointegration analysis based on datasets available from the ECB Statistical Data Warehouse and the results show significant variability between countries. To analyse the determinants of pass-through rates in the Eurozone, the rates are regressed on 9 aggregates of country-level banking sector including concentration, profitability, or funding. Out of the tested predictors, surprisingly only the ratio of Wholesale Funding to Liabilities proves to impact the pass-through rates significantly, with a positive sign, indicating that countries where banks rely more heavily on wholesale funding exhibit higher pass-through of the market interest rate changes to the NMD deposit rates.

Suggested Citation

  • Milan Fičura & Jiří Witzany, 2021. "Determinants of NMD Pass-Through Rates in Eurozone Countries," FFA Working Papers 4.004, Prague University of Economics and Business, revised 11 Mar 2022.
    • Handle: RePEc:prg:jnlwps:v:4:y:2022:id:4.004
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    References listed on IDEAS

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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
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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