European Central Bank research shows euro area banks’ deposit franchise values rise with higher interest rates and market concentration, supporting profitability and valuations

The European Central Bank published analysis in its May 2025 Financial Stability Review on euro area banks’ deposit franchises, finding that attracting and retaining low-cost, stable deposits can act as a stabilising force by supporting profitability and containing interest rate risk. The analysis defines a bank’s deposit franchise value as the long-term present value of earnings from deposit funding minus operating expenses. The interest rate environment is identified as the key determinant because deposit rates are typically low and relatively insensitive to market rates, while operating expenses also tend to be interest-rate-insensitive. In the low-for-long period, the deposit franchise was an economic liability for virtually all euro area banks, but the shift to higher rates pushed values back into positive territory, with positive values observed when long-term interest rates exceeded 1.8%. Higher market concentration, market power and cost efficiency are associated with higher deposit franchise values, with more concentrated systems (such as Greece and Cyprus) tending to show higher values than less concentrated markets (including Germany, France and Austria). Higher deposit franchise values are also associated with higher market valuations, and the box notes that weak valuations can hinder banks’ ability to raise capital and provide credit; it also flags that this business model can entail deposit-run risk in a confidence shock and that greater deposit-market competition or higher household participation in financial markets could pressure franchise values.