SDG 8: Decent Work and Economic Growth | SDG 16: Peace, Justice, and Strong Institutions
Institutions: Reserve Bank of India RBI | Ministry of Finance
Research from the European Central Bank (ECB) reveals a new mechanism that weakens the effectiveness of monetary policy transmission: the practice of cross-selling by commercial banks. Banks determine deposit rates not just by current profits, but by the lifetime value of clients, which includes future cross-selling profits from products like mortgages and insurance.
This focus on maximizing client lifetime value causes banks to pass policy rate changes incompletely to the interest rates they pay on customer deposits. Specifically, when central banks raise policy rates, banks raise deposit rates less than expected, because they are less concerned about losing depositors and sacrificing future cross-selling revenue. Conversely, when rates fall, banks also reduce deposit rates less relative to the policy cut. This mechanism results in a weaker pass-through to deposit rates but paradoxically strengthens the overall transmission of monetary policy to deposit growth and loan growth.
This research provides central banks with a crucial, previously overlooked structural insight, demonstrating that banksβ strategic prioritization of client lifetime value through cross-selling intentionally weakens the expected pass-through to deposit rates. Understanding this mechanism is essential for the ECB to accurately forecast and calibrate the impact of its rate decisions on credit volumes and economic activity across the euro area.
What is Monetary Policy Pass-Through? β Monetary Policy Pass-Through is the process by which changes made by a central bank to its key policy interest rates (like the ECBβs deposit facility rate) are subsequently transmitted through financial intermediaries, such as commercial banks, to the interest rates paid on deposits and charged on loans to households and firms.
Follow the full report here: Monetary policy transmission through cross-selling banks