Nicosia, Cyprus. High concentration in banking markets slows the speed at which central bank interest rate changes reach consumers and businesses, according to a study released by the Central Bank of Cyprus on Tuesday.
Study findings on concentration and rate transmission
The study, authored by Aris Avgousti and Stephani Michael of the centre for strategy and policy production, examined the link between banking concentration and monetary policy transmission. It found that more concentrated markets show a weaker and slower pass-through of policy rates to retail interest rates.
“The empirical analysis demonstrates that more concentrated banking markets present a weaker and slower transfer of policy rates to bank rates across the euro area,” the authors said.
Impact on deposit rates and corporate deposits
The study said the effect is particularly strong in deposit rates, especially for deposits of non-financial corporations.
Competition and monetary policy effectiveness
The report said the degree of competition between banks affects the operation of the financial system and, by extension, the effectiveness of monetary policy, credit constraints, financial stability, and economic growth.
“A competitive banking system facilitates the faster and more efficient pass-through of policy rate decisions toward lending and deposit rates,” the authors said.
In markets with limited competition or high concentration, the study said dominant banks may be less sensitive to changes in policy rates, weakening the transmission mechanism.
Market power, lending rates, and broader effects
The researchers said market power in the banking system typically leads to higher lending rates, which indirectly affects inflation.
The report also said that healthy competition, supported by strong institutional and supervisory frameworks, can lead to higher-quality loan allocation, improved access to credit, and the allocation of resources toward more productive uses.
Cypriot banking sector context
The study noted that while high concentration has been recorded in the Cypriot banking sector in recent years, this does not necessarily translate into a corresponding strengthening of market power.
How do you think banking competition should be strengthened to improve the pass-through of interest rate changes?