European Central Bank research proposes cross-selling incentives as a driver of incomplete deposit rate pass-through

The European Central Bank published research examining why banks often adjust customer deposit rates less than policy rate changes and what this implies for monetary policy transmission. The article proposes a framework in which banks set deposit rates not only to maximise current deposit profits but also to retain and attract customers they expect to cross-sell to later, helping explain why deposit rates can remain above policy rates when policy rates are low or negative. Using Norwegian annual tax data for 2004-18 covering the universe of bank-household relationships, the authors estimate pass-through by regressing deposit rate changes on policy rate changes and relate it to each client’s cross-selling potential, proxied by the estimated propensity to take out a mortgage with the same bank. Pass-through is weaker for clients with greater cross-selling potential, including after controlling for municipal deposit market concentration (Herfindahl Hirschmann Index), suggesting cross-selling and market-power channels can jointly explain deposit pricing. The evidence also indicates that weaker pass-through for higher cross-selling potential is associated with stronger transmission to deposit growth and loan growth, while euro area supervisory survey data suggest banks that consider cross-selling pay higher deposit rates and charge higher lending spreads for given policy rates, although the available years do not allow significance testing or linking patterns to policy-rate changes.