The European Central Bank has published a working paper examining how euro area banks’ funding structures affect the transmission of policy rate changes to lending and deposit rates. The research finds that banks relying more on short-term money market funding adjust lending rates more strongly and persistently, while those with larger bond funding shares respond more slowly and by less. Pass-through is weakest at banks combining high bond funding with a high share of loans carrying long rate-fixation periods, pointing to an asset-liability-management channel in monetary transmission. Aggregate estimates show that about 40% of a policy rate change passes through to new loans to non-financial corporations immediately, rising to about 80% after three months, while pass-through to household overnight deposits remains below 20%. The bank-level analysis covers 266 banks from July 2007 to April 2023. A model calibrated to the estimated pass-through indicates that assuming immediate and complete adjustment in bank rates overstates monetary policy’s effects on output and inflation.
2026-08-20European Central Bank
European Central Bank working paper finds bond funding and fixed-rate lending mute monetary policy pass-through
A European Central Bank working paper finds that euro area banks reliant on money market funding pass policy rate changes through to lending rates more strongly than banks funded through bonds. Pass-through is most muted when high bond funding is combined with long-fixed-rate lending. The research estimates 40% immediate pass-through to new corporate loans, rising to 80% after three months.