The European Central Bank published a working paper mapping the euro-area digital-banking segment and assessing how digital-only banks transmit monetary policy compared with brick-and-mortar peers. Using supervisory data for 2016–2025 and a difference-in-differences design around the tightening cycle that began in July 2022 and the first easing step in June 2024, the paper finds that digital banks reprice retail funding more quickly and strongly in tightening, while loan-rate pass-through is broadly similar to other banks, implying margin compression and a later slowdown in lending growth. The analysis compiles a hand-checked universe of over 170 digital banks and classifies them by business model (e-retail, e-service, e-wholesale). Digital banks are described as small on average but fast-growing, relying more on household deposits that are predominantly overnight, and holding larger cash buffers and intangibles than traditional banks. During tightening, household deposit rates rose by roughly 15 basis points more per 100 basis points of policy-rate increases at digital banks, with the largest differentials at overnight maturities and among stand-alone institutions; corporate-funding effects point in the same direction but are weaker and less robust. Household deposits are markedly more rate-sensitive than corporate or unsecured funding, and although retail inflows were sustained through the tightening phase, compressed margins are associated with a sharper deceleration in balance-sheet growth and non-financial private sector lending later in the cycle. In early easing, digital banks cut new funding rates relatively quickly, particularly at longer maturities, but premia on outstanding deposits persisted and their earlier advantage in retail inflows softened as margins began to normalise. The paper notes that easing-phase results are preliminary given the short window and transmission lags, and it highlights supervisory and macroprudential considerations linked to more rate-sensitive retail funding, including monitoring insured versus uninsured deposit composition and incorporating asymmetries across hiking and cutting cycles in scenario and stress-testing frameworks.
European Central Bank 2026-03-25
European Central Bank working paper finds digital banks pass through rate hikes faster to household deposits but not to loan rates
The European Central Bank's working paper examines how digital-only banks in the euro area transmit monetary policy compared to traditional banks. The study finds that digital banks adjust retail funding rates more swiftly during tightening cycles, leading to margin compression and slower lending growth, while loan-rate pass-through remains similar. The paper also highlights supervisory considerations due to the rate sensitivity of retail funding and the need for scenario and stress-testing frameworks to account for asymmetries in policy cycles.