Why Do Banks Pay More Interest When Central Banks Say Rates Are Low?
Here's a head-scratcher: when central banks lower interest rates, you'd expect banks to follow suit, right? But surprisingly, they often pay depositors more than the central bank's rate, even when those rates are negative. This puzzling behavior has economists scratching their heads. The traditional explanation, known as the 'deposits channel' (Drechsler et al., 2017), suggests banks are only focused on maximizing short-term deposit profits. But this doesn't fully explain why they'd pay more than they have to, especially when it seems like they'd be better off risking deposit outflows. And this is the part most people miss: there's a whole other game at play – cross-selling.
The Cross-Selling Secret: Banks Play the Long Game
In a groundbreaking study, Basten and Juelsrud (2025) propose a new framework that flips the script. They argue banks aren't just after quick deposit wins; they're playing a long game. Think of attracting depositors like an investment. Banks might initially lose money on deposits, but they're banking on turning those depositors into loyal customers who'll buy mortgages, loans, and other profitable products down the line. This 'cross-selling' strategy changes everything. When central bank rates drop, the future profits from cross-selling look even more attractive, so banks are willing to pay higher deposit rates to reel in those potential future customers.
Crunching the Numbers: Real-World Evidence
Basten and Juelsrud don't just theorize; they back it up with hard data. Using detailed Norwegian tax records, they track every bank-household relationship from 2004 to 2018. This granular data allows them to see how deposit rates vary based on a customer's potential for cross-selling. Here's the kicker: the more likely a customer is to buy other bank products (like a mortgage), the less the bank passes on central bank rate cuts to their deposit rate. This finding holds even when controlling for other factors like market concentration.
Controversy Alert: Is Cross-Selling the Whole Story?
While the cross-selling framework is compelling, it doesn't completely replace the traditional 'deposits channel.' Both factors seem to be at play, influencing how banks set deposit rates. This raises interesting questions: How much weight do banks give to each factor? Does the balance shift depending on economic conditions? What do you think? Is cross-selling the dominant force, or is it just one piece of a complex puzzle? Let us know in the comments!
Beyond Norway: A Eurozone Story?
The Norwegian data is incredibly detailed, but does this story hold up elsewhere? Basten and Juelsrud peek into the Eurozone using data from the Single Supervisory Mechanism. While the data is limited, it suggests banks across the Eurozone, with its 350 million inhabitants, also consider cross-selling when setting deposit and loan rates. This hints at a broader phenomenon that could have significant implications for monetary policy transmission across the continent.
The Bottom Line: It's Not Just About Deposits
This research reveals a nuanced picture of how banks operate. They're not just deposit-taking machines; they're relationship builders, strategically pricing products to maximize long-term customer value. This has profound implications for understanding how monetary policy ripples through the economy. Differences in cross-selling potential across countries, banks, and regions could lead to uneven effects of the same central bank policy. It's a reminder that the financial system is far more complex than simple interest rate adjustments – it's a web of relationships and incentives that shape our economic reality.
