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Monetary Policy Transmission through Online Banks

Author

Listed:
  • Erel, Isil

    (Ohio State U and ECGI)

  • Liebersohn, Jack

    (U of California, Irvine)

  • Yannelis, Constantine

    (U of Chicago)

  • Earnest, Samuel

    (U of Chicago)

Abstract

Financial technology has reshaped commercial banking. It has the potential to radically alter the transmission of monetary policy by lowering search costs and expanding banking markets. This paper studies the reaction of online banks to changes in the federal funds rate. We find that these banks increase rates that they offer on deposits significantly more than traditional banks do. A 100 basis points increase in the federal funds rate leads to a 30 basis points larger increase in the rates of online banks relative to traditional banks. Consistent with the rate movements, online bank deposits experience inflows, while traditional banks experience outflows during monetary tightening in 2022. Results are similar across banking markets of different competitiveness and demographics, but they vary with the stickiness of banking relationships. Our findings shed new light on the role of online banks in interest rate passthrough and the deposit channel of monetary policy.

Suggested Citation

  • Erel, Isil & Liebersohn, Jack & Yannelis, Constantine & Earnest, Samuel, 2023. "Monetary Policy Transmission through Online Banks," Working Paper Series 2023-15, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2023-15
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    Cited by:

    1. Hasan, Iftekhar & Li, Xiang & Takalo, Tuomas, 2023. "Technological innovation and the bank lending channel of monetary policy transmission," BOFIT Discussion Papers 9/2023, Bank of Finland Institute for Emerging Economies (BOFIT).
    2. Bindseil, Ulrich & Senner, Richard, 2024. "Destabilisation of bank deposits across destinations: assessment and policy implications," Working Paper Series 2887, European Central Bank.

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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