Unraveling the Mystery: How Banks Navigate Monetary Policy and Cross-Selling
Imagine a complex dance between banks and monetary policy, where every move impacts the economy. This intricate relationship is often shrouded in complexity, but today, we're going to demystify it and uncover some fascinating insights.
The traditional view, as outlined by Drechsler et al. (2017), suggests banks focus solely on immediate deposit profits, ignoring future gains. However, this paradigm struggles to explain certain behaviors, especially when policy rates turn negative. Basten and Mariathasan (2023), along with others, have shown that banks often offer deposit rates above policy rates, even in such scenarios. This behavior seems counterintuitive if banks only care about short-term gains.
But here's where it gets controversial...
In our recent work, Basten and Juelsrud (2025), we propose a new framework that offers a fresh perspective. We argue that banks are not just concerned with immediate profits but also with the long-term value of their clients. By offering attractive deposit rates, banks aim to retain existing depositors and attract new ones, with the ultimate goal of cross-selling additional products like mortgages.
And this is the part most people miss...
Our research shows that banks adjust their deposit rates based on the potential for cross-selling. When policy rates fall, the future profits from cross-selling increase, prompting banks to reduce deposit rates less aggressively. Conversely, when policy rates rise, banks are less worried about losing depositors and thus raise deposit rates less.
To quantify these effects, we analyzed data on every bank-household relationship in Norway for the period 2004-2018. We found that banks with greater cross-selling potential passed on policy rate changes less to deposit rates. This was true even after controlling for various factors, including the Herfindahl Hirschmann Index (HHI), a common measure of bank market power.
Our findings suggest that cross-selling considerations not only impact deposit rates but also affect the entire chain of monetary policy transmission, from deposit growth to loan growth. Moreover, these considerations can lead to heterogeneous policy transmission across countries, banks, and regions, depending on factors like home ownership, demographics, and customer loyalty.
But here's the kicker: our research, based on Norwegian data, raises an intriguing question. Are these findings specific to Norway, or do they hold true across the euro area? To address this, we analyzed data from the Single Supervisory Mechanism (SSM) in the euro area. This data, collected as part of the Supervisory Review and Evaluation Process (SREP), reveals that banks across the euro area, with its 350 million inhabitants, also consider cross-selling when pricing their products.
So, what does this all mean? Our work highlights that banks are sophisticated entities, optimizing not just for short-term profits but also for the lifetime value of their clients. This has significant implications for how monetary policy is transmitted through the banking system.
But here's the real question: do you think our findings are applicable to other economies, or are they unique to the specific context of the euro area? We'd love to hear your thoughts and opinions in the comments below!
