Monetary Policy Transmission Through Online Banks

Fisher College of Business Working Paper No. 2023-03-015

Charles A. Dice Center Working Paper No. 2023-15

77 Pages Posted: 26 May 2023 Last revised: 19 Dec 2023

See all articles by Isil Erel

Isil Erel

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Jack Liebersohn

University of California, Irvine

Constantine Yannelis

University of Chicago

Samuel Earnest

University of Chicago

Multiple version iconThere are 3 versions of this paper

Date Written: May 25, 2023

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.

Keywords: Financial Technology, FinTech, Digitalization, Passtrough, Pass-through, Neobank, Commercial Banks, Deposit Channel

JEL Classification: E52, E58, G21, G23, G28

Suggested Citation

Erel, Isil and Liebersohn, Jack and Yannelis, Constantine and Earnest, Samuel, Monetary Policy Transmission Through Online Banks (May 25, 2023). Fisher College of Business Working Paper No. 2023-03-015, Charles A. Dice Center Working Paper No. 2023-15, Available at SSRN: https://ssrn.com/abstract=4459621 or http://dx.doi.org/10.2139/ssrn.4459621

Isil Erel

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Jack Liebersohn (Contact Author)

University of California, Irvine ( email )

Division of Nephrology, University of California I
101 City Drive South, City Tower, Suite 400-ZOT;40
Orange, CA California 92868-3217
United States

Constantine Yannelis

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Samuel Earnest

University of Chicago ( email )

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