The nexus between the deposit and risk-taking channels of monetary policy

This paper examines the deposit channel of monetary policy during the fastest and most intense tightening cycle of the euro era. Using the Banco de España’s Central Credit Register and regional variation in deposit market concentration, we show that the limited pass-through of policy rates to deposit rates produces heterogeneous effects on bank credit supply and risk-taking. Following the tightening cycle, banks operating in more concentrated deposit markets reduced credit more sharply to riskier firms. For newly originated loans, this contraction was accompanied by higher interest rates and improved realized returns. We document a novel dimension of the deposit channel: it compels banks to actively optimize their risk-return trade-off. Our results show that preserving deposit franchise value leads banks to prioritize prudence, reversing the “search-for-yield” dynamic observed during the zero-lower-bound era.