The bank lending channel and the deposit channel of monetary policy: an empirical analysis of Eurozone banks

• A positive spread triggers the deposit channel in highly concentrated markets. • Negative spreads do not activate the deposit channel. • Differences in deposit spreads may lead to asymmetric transmission of monetary policy . This study analyzes the deposit channel, emphasizing how positive and negative deposit spreads affect the impact of monetary policy changes on loan supply differently. Using a sample of 703 banks from 11 countries in the Eurozone between 2010 and 2023, we find evidence supporting the deposit channel in markets with high concentrations when deposit spreads are positive, partially validating this deposit channel. However, when deposit spreads are negative, our results do not support the deposit channel. These findings suggest that when deposit spreads are positive, the European Central Bank should consider the effects of the deposit channel in its decisions to achieve smoother transmission of monetary policy .