How banks fund themselves affects the reach of ECB rate decisions, study finds
A recent study has found that the way banks fund themselves significantly impacts the effectiveness of European Central Bank (ECB) rate decisions. The research, which analyzed data from 266 individual banks between July 2007 and April 2023, reveals that banks relying more heavily on short‑term money‑market funding tend to adjust lending and deposit rates more strongly and persistently after a policy‑rate change.
Bank Funding and ECB Rate Decisions
The findings matter because bank lending is a major source of finance for companies across the euro area. Consequently, variations in how banks react to ECB moves can shape borrowing costs, investment, production and ultimately inflation. When the ECB alters its policy rates, commercial banks transmit the change by setting the price of new loans and the interest paid on deposits.
The authors used euro‑area aggregate data spanning 2001‑2023 together with ECB records covering the 266 banks. The bank‑level work concentrated on new loans to non‑financial corporations and on overnight deposits. At the euro‑area level, the team observed that ECB policy shifts do reach corporate borrowing rates, but the transmission is neither instantaneous nor complete.
Interest‑rate Pass‑through
Only about 40 percent of a policy‑rate adjustment showed up in rates on fresh corporate loans right away, climbing to roughly 80 percent after three months. Deposit rates, especially those paid on household overnight balances, reacted more slowly and by a smaller margin. These patterns indicate that a single ECB decision can produce very different outcomes depending on whether it affects a loan, a deposit or another financial product.
Short‑term Money‑market Funding
Banks that depend heavily on short‑term money‑market borrowing tend to pass ECB policy changes through to their lending rates more forcefully and for a longer period. Money‑market funding involves borrowing for brief intervals, so its cost can shift quickly when central‑bank rates move. As a result, when the ECB raises rates, banks with a high share of this funding face a rapid rise in their own borrowing costs and have a stronger incentive to lift loan rates.
Bond Funding Versus Money‑market Funding
By contrast, banks that rely more on issuing bonds experience a slower impact because bonds typically lock in funding for longer horizons at rates that do not reset as quickly when short‑term policy rates change. This funding‑source distinction can lead to divergent effects of ECB rate decisions on borrowing costs and the broader economy.
The study’s conclusions highlight the importance of bank funding structures in the transmission of monetary policy. By shedding light on how different financing mixes shape the pass‑through of ECB rates, the research offers valuable insight for policymakers and market participants seeking to gauge the real‑world impact of central‑bank actions.
Source: cyprus-mail.com · 2026-08-22