Financing costs for banks in Germany in the monetary policy interest rate cycle

Financing costs for banks play an important role in the transmission of monetary policy. This is because changes in the cost of funding for banks generally lead to changes in bank lending rates. The tightening of monetary policy that began at the beginning of 2022 has also been reflected in higher financing costs for banks in Germany, in the form of rising market interest rates. In response to this, banks increased interest rates on bank loans. This was in line with the monetary policy objective of curbing lending in order to bring the excessively high inflation rate in the euro area back to the target level by reducing aggregate demand.

This article presents a financing cost indicator (FCI) for banks in Germany. The indicator combines the cost contributions by banks’ various funding sources into a single metric. The prices of the funding sources are weighted by their share of the volume in the banks' financing mix. The indicator shows that the deposits of the private non-financial sector and banks' securitised liabilities have traditionally been the largest contributors, and remain so to this day.

The FCI of banks in Germany increased substantially during the most recent period of monetary policy tightening. Initially, there was a noticeable uptick in yields on securitised liabilities. Subsequently, it was chiefly the higher cost of deposits of the private non-financial sector that contributed to the rise in the FCI. As a result, in autumn 2023, the FCI reached its highest level in more than ten years.

A comparison with the FCI peak recorded in the period of monetary policy tightening in 2005 to 2008 shows that funding costs were not at unusually high levels when they reached their most recent high level. Despite a similarly high key interest rate level as in September 2008, the FCI was significantly lower in autumn 2023. The pace of the latest increase in the FCI was also not out of the ordinary given the rapid series of interest rate hikes. The differences in the levels are partly due to price factors. The onset of the global financial crisis in 2008 resulted in a massive increase in the cost of financing in money and capital markets. In addition, banks' financing structure changed. Securitised liabilities accounted for a significantly larger share of bank financing in the period leading up to the financial crisis than they did afterwards. At the same time, the share in terms of volume of relatively low-cost deposits of the private non-financial sector was significantly lower prior to the financial crisis than it is now. Monetary policy and regulatory measures adopted after the financial crisis contributed significantly to these shifts in volume. In recent years, banks have once again increasingly availed themselves of the option of financing via money and capital markets. This development is likely to continue, given the final repayment in December 2024 of the funds taken up under TLTRO III and the scaling back of the Eurosystem's monetary policy portfolio.

1 Introduction

When banks grant loans, they usually have to finance them. To this end, banks can, for example, use deposits from households or enterprises or issue debt securities. The costs incurred by banks in this regard are a key factor in the pricing of their loans.[1] As a result, the cost of financing for banks is also of particular significance for monetary policy because changes in bank funding costs typically lead to changes in bank lending rates. In turn, the lending rates have an impact on the inflation rate via investment and consumption (see Chart 2.1).

**Table 2.1: A stylised bank balance sheet**
Assets	Liabilities and capital
Cash and cash balances at the central bank	Liabilities to the central bank
Credit	Deposits
Loans	of domestic banks
Securities¹	of euro area households and non-financial corporations
	of central, state and local government of the euro area
	of other financial corporations of the euro area
	of non-residents²
	Securitised liabilities (e.g. bank debt securities)
	Equity
1 Including equity and other shares. 2 These include deposits by non-banks outside the euro area and deposits by banks outside Germany. Non-banks comprise non-financial corporations, households, non-profit institutions, central, state and local government and other financial corporations.

The cost of financing for banks is a key element in the transmission of monetary policy due to the influence this has on bank lending rates.[2] For the purposes of analysing and calibrating monetary policy, it is important to identify the factors that determine the cost of financing for banks and to monitor their development. Depending on the extent to which banks make use of the individual funding sources, monetary policy impulses may be transmitted by banks in a diluted or concentrated form, or in a delayed or accelerated manner. In addition to standard monetary policy, which primarily determines the cost of financing for banks in the shorter term, there are additional factors that have a long-term impact on the cost level and the structure of banks’ financing mix. These include non-standard monetary policy measures as well as structural changes that concern regulatory requirements or the investment behaviour of economic actors, for example.

An individual bank has little room for manoeuvre when it comes to pricing some of its funding sources. Changes in the prices of these components are heavily influenced by monetary policy decisions, in particular changes in key interest rates. The series of key interest rate hikes that began in the euro area in July 2022 are reflected in higher prices for two of banks’ main funding sources: Chart 2.2 shows that in 2022 and 2023, financing via both bank debt securities and the money market became noticeably more expensive. An individual bank can determine the extent to which it draws on these sources of financing. By contrast, it can do little to influence the price of this financing component.

Key interest rate and prices of major funding sources for banks in Germany

With regard to the deposits of households and non-financial corporations, the influence of the individual bank on pricing depends on its market power. Depending on a bank’s business model, the share of customer deposits in its financing mix can vary greatly. Whilst it is true that interest rates have also risen for customer deposits since 2022 because banks have raised them, the prices of these components rose to a much lesser extent and also at a later point in time than for the funding sources where banks have little room for manoeuvre in terms of pricing. However, there are limits to this room for manoeuvre, even in the case of deposits. When a bank sets its interest rates for deposits, it has to factor in a high degree of uncertainty regarding the volumes that will accrue to it. This is because they also depend on how competitors set their prices and on alternative investments.

A financing cost indicator (FCI) can be calculated to summarise the development of the costs of various sources of bank financing.[3] In this context, it makes good sense to focus on the cost of debt financing. This is because capital costs constitute imputed costs. Although these can be derived from share price developments based on certain assumptions, only few banks in Germany are listed on the stock exchange (see the supplementary information on constructing an indicator for banks' financing costs). An FCI is made up of the relative weightings of the funding sources and their respective prices at a given point in time. This means it reflects the marginal financing costs at that point in time.[4] Changes in the prices of large-volume funding sources have a comparatively strong impact on the development of the FCI. However, shifts in volumes between the funding sources also have an effect on financing costs overall. Over time, banks can, to a limited extent, exchange different funding sources for each another. If the price of one funding source rises disproportionately, banks often shift volumes towards more affordable forms of funding, to the extent that they are able to do so.

In the most recent period of monetary policy tightening in 2022 and 2023, the FCI rose swiftly and sharply and remained at an elevated level in 2024. The current FCI level and changes in it since the start of 2022 are discussed in parts 2 and a3 of this article. Supplementary information compares in greater detail the FCI of banks that are financed primarily by deposits with the FCI of banks that are financed more by market-based sources. Part 4 demonstrates that the FCI followed a different path during the most recent period of monetary policy tightening than it did during the period of tightening prior to the global financial crisis. What is behind the differences in the development of the FCI and its respective levels in the two periods? Part 5 provides answers to this question. The reasons for the differences can be found chiefly in the period between the two periods of tightening. This was, after all, a period shaped by monetary policy easing during the financial and the European sovereign debt crisis, as well as regulatory changes and a protracted period of negative interest rates. The article concludes by describing how the FCI has developed in 2024, when monetary policy began to ease the degree of restriction once more.

Constructing an indicator for banks’ financing costs

In order to monitor and classify developments in banks’ collective financing costs, the Bundesbank uses a financing cost indicator (FCI). The calculation is based, first, on information on the debt financing structure of the banking sector, i.e. the volumes of financing sources used. Second, information on current interest rates and yields on these funding sources is used. This comprises new business rates on various deposits and the yields on bank debt securities. The FCI for the banking sector presented here is calculated as the stock volume-weighted average of current interest rates and yields. This allows changes in the FCI over time to be attributed to price and volume changes.

The FCI presented in this supplementary information indicates the notional interest rate at which the banking system could refinance its existing liabilities afresh in the composition on a given reference date. It therefore measures the volume side based on stock variables, but the price side based on new business rates. There are various reasons why it makes sense to merge these disparate concepts. With regard to the volume side, it is assumed that banks are, at the current end, obtaining funding in line with the financing structure of the stocks of their outstanding liabilities and thus retain this financing structure. This assumption prevents the indicator from fluctuating strongly on a monthly basis if the volume shares of new business from individual financing sources vary significantly over time. If the relatively stable stock volumes are used to calculate the indicator, changes in the indicator can generally be interpreted as price signals in the short term. Volume shifts between funding sources only become apparent in the longer term using this calculation method.

As the price side is reflected by new business, this is an indicator of marginal financing costs. This approach makes sense because, in the monetary policy transmission context, the focus is on marginal financing costs – as opposed to average financing costs. This is because marginal financing costs form the basis for banks’ lending decisions: in order to set their lending rates, banks compare the marginal costs of their financing with the potential income. Lending rates, in turn, impact on aggregate demand and thus also on inflation. Alternatively, and in the context of other questions, financing costs can also be calculated on the basis of the average interest rates for the stock of individual financing sources. Such an indicator of average financing costs is useful for topics where past decisions also matter. One example is the topic of financial stability: previous financing and lending decisions are a major factor in banks’ profitability. This, in turn, affects banks’ resilience and, as a result, also financial stability as a whole.

The FCI presented here is designed as a debt financing cost indicator and disregards the cost of equity; moreover, the FCI approximates financing costs rather than calculating them exactly. Capital costs are imputed costs and, unlike borrowing costs, cannot be observed directly. Under certain assumptions, they can be indirectly derived from share price movements. However, a large proportion of banks in the German banking system – especially the savings banks and cooperative banks, whose numbers make them a meaningful factor – are not listed on the stock exchange. Lastly, given the data available, the interest rates or yields on some financing positions can only be approximated by means of the prices of related financing instruments. For the FCI, this means that financing costs cannot be modelled precisely.

The monthly balance sheet statistics provide information on the financing structure of the German banking sector, i.e. the volume side of the FCI.[1] Only those positions that represent costs to the banking system as a whole are relevant for an indicator that is intended to model the banking sector’s total debt financing costs. Interbank loans within the banking system under consideration balance each other out and are therefore disregarded. This is because they are a liability for the borrowing bank, but a claim for its respective counterparty. In aggregate terms, interbank loans therefore do not create costs for the banking system as a whole, but only create redistributions within the system. The same applies to liabilities arising from derivatives transactions with the banking sector. Derivatives liabilities to non-banks are negligible because of their small size and are therefore also omitted from the FCI.

Of the sources of debt financing included in the FCI, the deposits of euro area households and non-financial corporations, as measured by volume, are most important for banks. Chart 2.3 shows that, in October 2024, time, savings and overnight deposits of the private non-financial sector accounted for more than one-half of the debt financing of the aggregate German banking system (51.8 %). Securitised liabilities accounted for just under 20 % of debt financing. These mainly comprise bank debt securities issued in the capital market (around 18 % of debt financing), but also short-term debt securities issued in the money market (1.6 %). This was followed by deposits of non-residents[2] (16.5 %). Deposits of other financial corporations of the euro area, such as pension funds, insurance companies and other financial market players, accounted for nearly 8 %, while those by central, state and local government of the euro area accounted for just under 4 %. The German banking system’s liabilities to the Bundesbank, including those arising from targeted longer-term refinancing operations (TLTROs), accounted for 0.3 % of the German banking system’s debt financing. In the euro area as a whole, the composition of banks’ funding mix is very similar to that of Germany.[3]

Percentage of financing sources in financing mix of banks in Germany

For the price side of the FCI, interest rates and yields from the MFI interest rate statistics and the securities issues statistics as well as money market rates are used. The MFI interest rate statistics record domestic banks’ new business rates on deposits of households and non-financial corporations in the euro area. New business rates need to be approximated for deposits of other economic agents. These include deposits of central, state and local government, which are mainly short-term deposits. The interest rate on overnight deposits of households is applied to these funds.[4] The interest rate on deposits of non-residents is approximated using the interest rate on overnight deposits of enterprises. The choice of a short-term interest rate is motivated by the fact that non-residents’ deposits are predominantly likely to constitute deposits of enterprises in order to settle their payments in euro. The average yield on secured and unsecured bank debt securities from the securities issues statistics is used as the yield on securitised liabilities. The main refinancing rate is used as the price for liabilities to the Bundesbank or the Eurosystem (excluding TLTROs), as the majority of banks’ funding needs have traditionally been covered by main refinancing operations with the Eurosystem. That changed with the introduction of targeted longer-term refinancing operations (TLTROs). The TLTRO price is approximated using the Eurosystem deposit facility rate. The interest rate on liabilities arising from deposits of other financial corporations of the euro area is approximated using the 12-month EURIBOR. This choice is motivated primarily by the investment behaviour of other financial corporations. That is because their investment decisions are informed by more targeted yield considerations than those of the private non-financial sector. The choice of the 12-month EURIBOR also reflects the fact that the deposits of other financial corporations break down evenly between original maturities of less than two years and those of more than two years.

The FCI is a volume-weighted average of prices for the various financing sources used by banks. The vertical line in Chart 2.4 shows the FCI at the end of October 2024. At that time, the FCI stood at just under 1.60 %. Deposits of households and non-financial corporations, at an interest rate of 1.2 %, particularly proved to be the most cost-effective source of financing. However, deposits of central, state and local government and by non-residents were also, in keeping with assumptions, relatively favourable sources of financing for banks. By comparison, issuance of securitised liabilities was relatively expensive. The yield was 2.8 %. For euro area banks as a whole, the picture is similar in terms of the prices of the various financing sources.

Financing cost indicator (FCI) of banks in Germany and interest rates of various financing sources

The balance sheet items (BSI) statistics are used for the euro area.
These include deposits of non-banks outside the euro area and deposits of banks outside Germany. Non-banks comprise non-financial corporations, households, non-profit institutions serving households, central, state and local government, and other financial corporations.
Instead of liabilities to the Bundesbank, the FCI for the euro area includes the liabilities of euro area banks to the Eurosystem.
In principle, the interest rate on overnight deposits of non-financial corporations would also be conceivable as an approximation of the interest rate conditions for government deposits. In terms of their stability, however, government deposits are likely to be more comparable to household deposits in many cases, for example in terms of the consistency of inflows and outflows.

2 Composition of the FCI at the current margin

The level of banks’ overall funding costs is derived from the sum of the prices for the individual funding sources – that is, their interest rates or yields. These are weighted using the share of the respective funding components in banks’ overall financing. An FCI combines the respective prices and volumes into a single metric (see the supplementary information on constructing an indicator for banks' financing costs, which also provides a more detailed presentation of the individual funding sources). This makes it possible to calculate the contributions by the individual funding sources to the overall financing costs. This is done by multiplying the prices of each funding source by its volume share in the financing mix. Viewed in isolation, the share of a funding source in the cost of financing for banks therefore rises when it becomes more expensive and/or is increasingly utilised. Chart 2.5 illustrates the contributions by the individual sources to the FCI at the end of October 2024. The FCI of banks in Germany stood at 1.60 % at this time.

Bank financing cost indicator (FCI) and contributions of individual funding sources

Historically and to date, two funding sources have been particularly relevant to the cost of financing for banks in Germany: deposits of the private non-financial sector (households and non-financial corporations) in the euro area, and securitised liabilities. Taken together, these two funding sources currently account for more than two-thirds of the cost of financing for banks in Germany as reflected in the FCI. In this context, the significant contribution made by deposits is due more to their major share in banks’ financing mix than to high interest rates on deposits. They currently account for somewhat more than half of the total volume of all funding sources included in the FCI. Deposits of households in particular are an attractive source of funding for banks. Given that these deposits are largely covered by deposit insurance, households accept a relatively low rate of remuneration. This means that banks can offer low interest rates on household deposits,[5] as illustrated in Chart 2.4 in the supplementary information on constructing the FCI. By contrast, deposits of non-financial corporations are somewhat more costly for banks, in part because the higher volume of such deposits often means they are not fully covered by deposit insurance. The average yield on banks’ securitised liabilities, which, for the purposes of calculating the FCI, includes long-term bank debt securities and short-term money market debt securities, is relatively high by comparison. Although banks are, on the one hand, rate takers in respect of these funding sources, on the other hand, this enables banks to raise larger sums on the market quickly and in a manner that is easy to calculate. It is not possible to achieve this to a comparable extent with deposits. Although securitised liabilities come at a high price, the contribution they make to the financing mix is currently lower than that of deposits, given that they account for a smaller share of the financing mix. Their volume share at the end of October 2024 stood at somewhat below 20 %.

Other components with a significant impact on the level of the FCI comprise deposits of other financial corporations of the euro area and deposits of non-residents.[6] The relevance of deposits of other financial corporations to the FCI, such as pension funds or insurance companies, is based on the fact that, at present, these deposits are comparatively expensive.[7] By contrast, the contribution of deposits of non-residents is primarily due to their sizeable, near 17 % volume share in banks’ financing mix. Conversely, the deposits of central, state and local government of the euro area and banks’ liabilities to the Bundesbank are of only minor relevance to the level of the FCI. The reason for this is that both funding sources only account for a comparatively small volume and therefore do not play a significant role in banks’ financing mix.

In the euro area, the FCI stood at 1.68 % at the end of October 2024, and was therefore somewhat higher than in Germany (see Chart 2.5). The higher funding costs for banks in the euro area are due mainly to the fact that banks in the euro area were obliged to pay higher average yields for their securitised liabilities than banks in Germany. By contrast, there were no notable differences in the volume shares of the individual funding sources.

The level of the FCI and the relevance of the various funding sources to overall financing costs are subject to change over time. The level of the FCI in Germany and the euro area is currently significantly higher than it was just three years ago at the end of the negative interest rate period. In the interim, increases in key interest rates in particular have led to changes in the cost of financing.

3 The cost of financing for banks during the period of monetary policy tightening in 2022‑23

The change in course in monetary policy adopted by the ECB Governing Council brought about a substantial increase in the FCI as of end-2021. In response to the sharp rise in inflation across the euro area, the ECB Governing Council began a series of interest rate increases in July 2022. By September 2023, ECB Governing Council had swiftly raised key interest rates by a total of 450 basis points in ten consecutive increments. This resulted in the deposit facility rate reaching its highest level since the euro was introduced in 1999. At the end of September 2023, the main refinancing operations rate had climbed to its highest point in over 20 years, reaching a level last seen in August 2001. After the FCI stood at −0.06 % at end-2021, only slightly higher than its historical low, it also edged up in the wake of the interest rate increases. The pace of the increase in the FCI remained noticeably lower than the rapid increases in key interest rates. The upward trend in the FCI began as early as the start of 2022. This was because the ECB Governing Council had signalled a change in course as early as December 2021,[8] triggering a rise in market interest rates. This rise initially affected longer-term interest rates and, consequently, also the components of the FCI with longer interest rate fixation periods, most notably the yields on bank debt securities. This was followed by money market rates over the course of 2022, and subsequently also the components of the FCI with a shorter interest rate fixation period. In addition, banks started to adjust their interest rates on customer deposits. Within less than two years, the FCI had risen to 1.90 % by the end of October 2023, thus reaching its highest level since April 2011. With the majority of market participants expecting key interest rates to be reduced again as of November 2023, longer-term interest rates also began to decline, whereupon the FCI also fell again.

Contributions of individual funding sources to the financing cost indicator (FCI) of banks in Germany during the recent ...

The sharp rise in yields on securitised liabilities was the main driver of the increase in the FCI until around the end of 2022 (see Chart 2.6). The average yield rose by over 300 basis points in the period between end-2021 and end-2022. While securitised liabilities were not the most important source of funding for banks in terms of volume, they remained a significant component of the financing mix, accounting for almost one-fifth of the volume of all funding sources included in the FCI. Securitised liabilities accounted for the largest share of the increase in the FCI in 2022 as a result of their high volume and the sharply higher yields. This is particularly evident when the FCI is calculated separately for different bank financing models (see the supplementary information on the evolution of banks' funding costs under different financing strategies). In 2022 the FCI rose primarily among the types of institutions for which financing via financial markets is of particular importance. These consist chiefly of commercial banks and the central institutions of network systems (Landesbanken and DZ Bank). By contrast, the FCI of the primary institutions in network systems (that is, savings banks and credit cooperatives) increased only slightly at first. This is because they are financed largely by deposits.

However, rising interest rates on the deposits of other financial corporations and the private non-financial sector in the euro area also made a substantial contribution to the increase in the FCI by the end of 2022. The interest rate on deposits of other financial corporations is approximated using the twelve-month EURIBOR. This rose significantly in 2022 and even exceeded the increase in yields on securitised liabilities. However, deposits of other financial corporations played a much smaller role than securitised liabilities in terms of volume in the period under review. Consequently, its contribution to the increase in the FCI is ranked second, behind that of securitised liabilities. The third largest contribution stemmed from the deposits of households and non-financial corporations in the euro area. Banks were hesitant about raising their interest rates on such deposits until the end of 2022. The increase in the aggregated interest rate was mainly driven by rising interest rates on time deposits. By contrast, interest rates on overnight deposits and savings deposits barely increased and remained around zero, as had been the case during the low interest rate period.[9] In 2022, however, the deposits of the private non-financial sector accounted for the highest weighting in the FCI, amounting to an average volume share of just under 50 %. Consequently, even the minimal increase in the aggregated interest rate on deposits resulted in a notable increase in the FCI.

The other funding sources for banks had a minor impact on the increase in the FCI in 2022. This is because either their volumes were relatively low or price increases were still restrained. The price of the TLTROs, in which the deposit facility rate is applied, rose sharply by 250 basis points during the period under review. However, funds taken up under the TLTROs accounted for only a small share of banks’ financing mix in 2022, not least because repayment of these funds had already begun.[10] Similarly, the deposits of non-residents and the deposits of central, state and local government of the euro area had barely any effect on the increase in the FCI in 2022.

Developments in the FCI from the beginning of 2023 to October 2023 were shaped by a significant increase in the cost of financing via deposits of the private non-financial sector in the euro area, as well as deposits of non-residents. The main reason for the increase in the price of deposits of the private non-financial sector was the sustained rise in interest rates on time deposits. This is because banks had raised them significantly by the autumn. In addition, banks were now also paying somewhat higher rates on overnight deposits and savings deposits, having initially raised interest rates on these deposits only to a very limited extent in 2022.[11] Moreover, the private non-financial sector was now increasingly reallocating funds away from lower-interest overnight deposits towards higher-interest time deposits. These three effects resulted in an increase of almost 1 percentage point in the aggregated interest rate across all deposit types over this period. At the same time, at around 50 %, the volume share of deposits of the private non-financial sector remained virtually as high as before because any volume shifts in banks' financing mix largely took place only between the various types of private non-financial sector deposits. All in all, more than half of the increase in the FCI during this period can be attributed to interest rate increases on these deposits and, consequently, to price effects. The increase in deposit interest rates was especially noticeable in the funding costs of the primary institutions of network systems, where funding is heavily dominated by deposits. In the first nine months of 2023, the FCI for these institutions quadrupled (see the supplementary information on the evolution of banks' funding costs under different financing strategies). The price of deposits of non-residents also rose markedly in response to the sustained increase in the twelve-month EURIBOR. However, their contribution to the increase in the FCI was much smaller than the contribution by the deposits of the private non-financial sector due to their lesser importance as a source of funding.

The remaining components of the FCI made a negligible contribution to its overall development in 2023. The main reason for this is that – unlike customer deposits – the majority of the price increases in the remaining components of the FCI had already occurred in 2022. Following the marked increase in yields for securitised liabilities in 2022, 2023 saw yields rise only slightly up to the end of October. The decline in inflation rates in the euro area during the course of 2023, and the accompanying mounting expectations among market participants that interest rates would be cut are likely to have been the main reasons for the modest rise in yields.

Funding costs also rose significantly in the euro area as monetary policy was tightened. The funding sources that contributed significantly to the increase in costs were the same as those in Germany. In addition, euro area banks operating in the deposit business with the private non-financial sector likewise only passed on the increase in key interest rates with a significant time lag.

The evolution of banks’ funding costs under different financing strategies

The German banking system is dominated by two types of financing strategy: traditional deposit-based funding (retail funding) and mixed financing consisting of a combination of customer deposits and capital market funding (retail and wholesale funding). The first of these is principally employed by the primary institutions of the network systems, i.e. savings banks and credit cooperatives. Their main source of funding is the traditional avenue of customer deposits from households and firms. The other banks in the German banking system also source funding from institutional depositors and the capital market. These include primarily the private commercial banks looked at in this article (big banks and regional banks) and the central institutions of the network systems.

Banks’ pricing power varies across the different funding sources: does this manifest in differences in the way the FCI evolves depending on the financing strategy employed? According to the literature, competition in the banking sector is imperfect. In Germany, this is probably because many banks are firmly anchored in a specific region and this breeds high customer loyalty. Linked to this is the degree of interest rate elasticity applying to demand for banking products, in other words whether even small interest rate differences are enough to prompt customers to shift their financial resources into alternative investments or not.[1] As far as financing through deposits of households and non-financial corporations is concerned, banks do, therefore, wield a certain amount of pricing power. In 2022‑23 this came to the fore in banks’ hesitant approach to adjusting the interest rates on households’ and non-financial corporations’ deposits to the higher interest rate environment. By contrast, when it comes to financing via the money and capital markets, banks tend to act more as price takers. As described in the main text, yields for market-based forms of financing tracked monetary policy tightening with little time lag. Based on these differences and the different financing strategies, the question arises as to the extent to which the funding costs of savings banks and credit cooperatives have differed from those of other banks in the time since 2022.

The primary institutions of the network systems (i.e. savings banks and credit cooperatives) draw most of their funding from deposits of the private non-financial sector (see Chart 2.7).[2] These banks are chiefly in the business of lending to non-financial corporations and households, with deposits by those actors making up the majority of the other side of their bank balance sheet. At the end of 2021, shortly before monetary policy began to be tightened, deposits from the euro area private non-financial sector accounted for just under 88 % of the funding mix considered in the FCI metric at savings banks and credit cooperatives. Deposits from non-residents and other financial institutions amounted to less than 3 %. The share of market-based financing via securitised liabilities was only slightly over 1 % since, in both network systems, issuance is largely the preserve of the central institutions.

Volume shares of financing sources in the funding mix of banks in Germany with different financing strategies

By contrast, the other banks in Germany, i.e. commercial banks and the central institutions (of the savings bank and credit cooperative network systems), rely on a broader funding mix. Financial market innovation, financial integration and the wave of deregulation in the 1990s opened up market-based business areas and forms of financing, which were mainly tapped by large and multinational banks.[3] A hallmark of this is the substantial role played by bank debt securities in the funding of commercial banks and central institutions; these made up more than 23 % of the funding mix at the end of 2021. Market-based financing instruments (securitised liabilities) also include short-term debt securities in the money market, which accounted for slightly more than 2 % of the combined commercial bank and central institutions’ funding mix at the end of 2021. These institutions therefore had a significantly higher proportion of all market-based financing in their funding mix than the savings banks and credit cooperatives, at just under 26 %. Deposits from euro area households and non-financial corporations made up 32 % of the funding mix, playing a much smaller role than for the savings banks and credit cooperatives. That said, the other banks also drew on funding from deposits of non-residents (24 %) and deposits of other financial corporations of the euro area (8 %) to a greater extent.

Selected interest rates and yields at banks in Germany with different financing strategies

From the beginning of 2022, average yields on securitised liabilities rose at all banks. For commercial banks and central institutions this form of financing is systematically more expensive than for savings banks and credit cooperatives (see Chart 2.8 ).[4] Overall, yields on securitised liabilities tracked monetary policy tightening with little delay at all banks. Since the end of 2023, average yields at German banks have ranged between 3 % and just over 4 %. For the savings banks and credit cooperatives, funding via securitised liabilities is generally somewhat cheaper. One reason for this is likely to be the existence of their own institutional protection schemes. These are designed to aid member institutions that are experiencing economic distress by safeguarding them from insolvency and liquidation.

The average interest rate applied to deposits of households and non-financial corporations rose more strongly at commercial banks and central institutions than at savings banks and credit cooperatives; it also went up earlier. Chart 2.8 shows that interest rates on private non-financial sector deposits were still close to zero at both types of institution until mid-2022.[5] Commercial banks and central institutions began raising their deposit rates in the second half of 2022. To compete with other banks, they may have sought to retain or attract deposits from interest-sensitive customers by offering higher interest rates. One incentive to do so was that this source of financing still remained cheaper for them overall than funding through securitised liabilities. However, when it comes to competition for deposits and to pricing power, savings banks and credit cooperatives are likely to have benefited from their pronounced regional ties and high customer loyalty. As a result, they were much slower to raise interest rates than the other banks and increased them less overall. This meant that in 2023 funding via deposits from households and non-financial corporations was up to 1 percentage point cheaper for savings banks and credit cooperatives than for the other banks. The interest rate spread narrowed of late, to around 70 basis points.

Different financing structures and the fact that prices for market and deposit-based funding sources went up at different times combined to make funding costs diverge depending on financing strategy as early as 2022. When the negative interest rate policy period came to a close at the end of 2021, funding costs for both types of institution were near zero. However, they started to diverge as soon as monetary policy tightening got under way. While savings banks and credit cooperatives’ funding costs increased only marginally to 0.20 % over the course of the year, funding costs at other banks climbed significantly to 1.33 % (see Chart 2.9). Funding via securitised liabilities was the biggest contributor to that increase, mainly due to the larger role that this avenue of funding plays for commercial banks and central institutions. However, deposits of other financial corporations of the euro area (which are assumed to be remunerated at the 12-month EURIBOR in the FCI) also grew more expensive up to the end of 2022. By contrast, the slightness of the increase in funding costs at savings banks and credit cooperatives stems from the fact that their funding mix is dominated by private non-financial sector deposits and banks barely raised interest rates on those in 2022.

Contributions of individual funding sources to the financing cost indicator (FCI) for banks in Germany ...

Between the beginning of 2023 and the end of the tightening cycle in 2023, the funding costs of both types of institution went up chiefly because the costs for deposits from households and non-financial corporations increased; however, higher costs for deposits by non-residents at commercial banks and central institutions drove a further divergence in funding costs. The increase in funding costs over the course of 2023 for both types of institution is primarily attributable to the significant rise in interest rates on deposits from households and non-financial corporations. This resulted in funding costs at savings banks and credit cooperatives hitting 0.86 % in October 2023. Deposits by households and non-financial corporations accounted for a smaller share of the funding mix at commercial banks and central institutions than was the case for savings banks and credit cooperatives. That said, with commercial banks and central institutions raising their interest rates on such deposits more strongly than savings banks and credit cooperatives did, this financing component pushed up their costs significantly, too. On top of that, they draw a greater proportion of their funding from deposits by non-residents (which are assumed to be remunerated at the interest rate on overnight deposits of euro area non-financial corporations for the purposes of the FCI) than savings banks and credit cooperatives. The increased cost of those fuelled the increase in funding costs for commercial banks and central institutions. At the end of October 2023, their funding costs amounted to 2.41 %. Ultimately, the difference between the funding costs of the two types of institution increased from 1.13 percentage points at the end of 2022 to just under 1.55 percentage points.

Since October 2023, funding costs at commercial banks and central institutions have fallen. By contrast, savings banks and credit cooperatives’ funding costs have continued to rise, with the gap between the funding costs of both types of institution narrowing as a result. The smaller difference was driven by a decrease in medium to long-term yields on securitised liabilities. After the last rise in key interest rates in September 2023, yields from October 2023 onwards anticipated financial market participants’ expectations of interest rate cuts. As a result, the funding costs of commercial banks and central institutions, who rely to a greater extent than savings banks and credit cooperatives on securitised liabilities for funding, fell to 2.01 % at last count. Meanwhile, savings banks and credit cooperatives carried on slowly but steadily raising the interest rates they paid to private non-financial sector depositors. Competition for deposits likely intensified the longer that monetary policy tightening lasted, placing those banks, too, under increasing pressure to adjust their deposit rates. Since October 2023, savings banks and credit cooperatives’ funding costs have risen to 0.95 % at last count. The gap between the funding costs associated with the two strategies thus stood at 1.06 percentage points.

Another major difference concerns the volatility of the funding costs of the two institution types, which is higher for commercial banks and central institutions than for savings banks and credit cooperatives due to the former’s more market-based approach to financing. Chart 2.10 shows the long-term evolution of the financing cost indicators for both types of institution. Comparing the FCIs reveals that the funding costs of commercial banks and central institutions are subject to greater fluctuations. This is because market-based funding figures more prominently in their funding mix, which means that volatility in the money and capital markets is more strongly reflected in the FCI of commercial banks and central institutions. Conversely, volatility in the money and capital markets cannot impact the FCI of savings banks and credit cooperatives to the same extent, as they obtain more of their funding from deposits. Accordingly, savings banks and credit cooperatives can reap more of the benefits of the pricing power that banks (regardless of institution type) exercise when setting prices for deposits of households and non-financial corporations. This pricing power allows banks to make relatively steady adjustments to their deposit rates. As a result, the FCI of savings banks and credit cooperatives, with their highly deposit-based financing structure, is rendered less volatile. However, the savings banks and credit cooperatives also benefit in another way, as the adjustments to their deposit rates do not necessarily have to track the movements of market interest rates one-to-one. In this sense, the high proportion of deposits in their financing structure effectively shields their capital from the impact of interest rate risk.[6]

Financing cost indicator (FCI) for banks in Germany with different financing strategies

See Deutsche Bundesbank (2023a).
The central institutions (Landesbanken and DZ Bank in its role as the central institution of the credit cooperatives) are counted as belonging to the category of other banks in this analysis: they make heavy use of market-based financing instruments as well, not least in their function as central institutions of their respective network.
See Deutsche Bundesbank (2015).
Yields on securitised liabilities are calculated using data from the Centralised Securities Database (CSDB) since the capital market statistics do not publish yields broken down by the categories of bank examined here.
Deposit rates responded to monetary policy tightening later than yields on market-based instruments. This pattern is likely to stem from the asymmetrical transmission of monetary policy stimuli to deposit rates. Deposit rates respond more strongly when policy rates are falling, and more weakly when policy rates are on the rise (see Deutsche Bundesbank (2023a)).
See Drechsler et al. (2021).

4 Comparison with developments in the 2005 to 2008 period of monetary policy tightening

For monetary policy, the question is whether banks' funding costs in autumn 2023 were at a level that was appropriate, given the intended restrictive effect of monetary policy. This is because the level of banks’ funding costs influences the general funding costs for the private non-financial sector via transmission to lending rates, and therefore ultimately also inflation (see Chart 2.1). Indications as to whether the level of funding costs, as measured by key interest rate hikes, was exceptionally high can be obtained, for example, by comparing it with the development of funding costs during the last period of significant monetary policy tightening between 2005 and 2008 (see Chart 2.11).[12]

Financing cost indicator (FCI) of banks in Germany: contributions, volume shares, interest rates and yields

The FCI rose significantly between 2005 and 2008. In addition to monetary policy tightening, the global financial crisis also had an impact on the FCI as of 2008. The reason for the tighter monetary policy in 2005 was the same as in 2022: excessive inflation. However, because there was a much smaller deviation from the price stability objective than in 2022, the tightening of monetary policy was not as rapid or as pronounced as in 2022‑23. In the period between December 2005 and September 2008, the ECB Governing Council increased key interest rates by 225 basis points in a series of nine steps. The onset of the financial crisis also coincided with a considerable increase in interest rates and yields, partly on account of elevated risk spreads. The FCI also increased significantly during this period. In September 2008, the FCI reached what remains its highest ever level of 3.85 %. It had stood at 2.06 % before beginning to rise in September 2005. This means that the 179 basis point increase in the FCI in the 2005 to 2008 period was similarly significant as the 196 basis point increase in 2022‑23.[13] However, it should be noted that the increase in 2005 to 2008 was spread over a period that was more than twice as long as the recent one.

A comparison with the peak reached by the FCI in the first period of tightening shows that funding costs did not reach exceptionally high levels in autumn 2023 despite the sharp increase in key interest rates in 2022‑23. On the contrary, compared to the key interest rate level, they even appear to be fairly low. The main refinancing rate, the relevant rate for monetary policy at the time, stood at 4.25 % in September 2008, which is at a similarly high level (4 %) to the rate for the deposit facility, currently the relevant rate for monetary policy, in autumn 2023. At the same time, however, at 190 basis points, banks’ funding costs in October 2023 were significantly lower than in September 2008. This was partly due to the fact that the prices of the key components of the FCI (deposits of private non-financial sector in the euro area, securitised liabilities, deposits of non-residents) in October 2023 were lower than when the financial crisis began in September 2008. Furthermore, the banking system had a different financing structure in 2008 (see Table 2.2). This structure featured a relatively high weighting of comparatively expensive funding sources. For instance, the volume share of securitised liabilities in the period leading up to the financial crisis was more than one and a half times higher than in previous years. Also, the comparatively costly deposits of other financial institutions used to play a larger role at that time. By contrast, the relatively low-cost deposits of households and non-financial corporations in the euro area played a significantly smaller role in the financing mix.[14]

**Table 2.2: Development of interest rates/yields and of the volume shares of various funding sources of banks in Germany**
Item	Interest rates/yields (% p.a.)			Volume share of FCI (%)
Item	Sep. 2008	Oct. 2023	Spread (percentage points)	Sep. 2008	Oct. 2023	Spread (percentage points)
Deposits of euro area households and non-financial corporations	3.10	1.27	- 1.83	31.9	50.1	18.2
Deposits of other financial corporations of the euro area	5.38	4.16	- 1.22	13.4	8.0	- 5.4
Deposits of central, state and local government of the euro area	2.05	0.56	- 1.48	2.8	4.2	1.4
Securitised liabilities	4.86	3.55	- 1.31	29.0	19.1	- 9.9
Liabilities to Bundesbank – excl. TLTROs	4.25	4.50	0.25	5.1	0.3	- 4.8
Liabilities to Bundesbank – TLTROs	3.25	4.00	0.75	0.0	1.3	1.3
Deposits of non-residents¹	2.58	0.97	- 1.61	17.8	17.1	- 0.7
Sources: Securities issues statistics, EMMI, ECB, MFI interest rate statistics, monthly balance sheet statistics and Bundesbank calculations. 1 Deposits of non-banks outside the euro area and deposits of banks outside Germany.

However, funding costs in 2023 still appear to be low even after adjusting the interest rates and yields in 2008 for the effects of the financial crisis. Given the exceptional increase in the price components of the FCI as a result of the financial crisis, the values for 2008 are distorted and only partially suitable as a basis for comparison. Therefore, to obtain a more meaningful comparison, it makes sense to replace the 2008 price components with values that were not impacted by the financial crisis. Given the similarity in key interest rate levels in 2008 and 2023, it stands to reason to apply the interest rates and yields for October 2023 and combine them with the volumes from September 2008. The notional FCI for September 2008 calculated using this method is 2.41 % (and therefore higher than the FCI for October 2023, which stood at 1.90 %). This means that current funding costs are lower even after “adjusting for” the high interest rates and high yields in 2008. The main reason for this is the shift in volumes in banks’ financing mix towards more affordable sources of funding in the period between 2008 and 2023.

The fact that the level of bank funding costs in 2023 is lower than in 2008 also had a positive impact on their earnings situation.[15] While average interest expense (as a ratio of total assets) rose significantly in the German banking system, much like the FCI, during the most recent period of monetary policy tightening, interest expense (as a ratio of total assets) in the German banking system in 2023 was only just over half of what it was in 2008. And that was despite key interest rates being roughly equally high at both points in time. Even with the recent increase, banks’ relatively low funding costs have had a positive impact on their earnings situation. Net revenue from interest-based business, for example, was up 10 % on 2008. This positive effect also becomes obvious when the FCI, which constitutes a weighted average of the prices on the liabilities and capital side of the bank balance sheet, is compared to a corresponding figure on the assets side: the aggregated lending rate[16] is the price banks charge for their most significant earnings component. The difference between this interest rate and the FCI remained stable between 2003 and 2022, consistently ranging between 2 % and 3 % (see Chart 2.12). Since the start of 2023, this difference has exceeded 3 percentage points for the first time. This is because the FCI rose to a much lesser extent than the aggregated lending rate. The increase in this difference also reflects the fact that the FCI is currently relatively low against the backdrop of the current interest rate level.

Financing cost indicator (FCI) of banks in Germany and aggregated lending rate

Similarly, banks' funding costs in the euro area, as measured by the level of key interest rates, were not exceptionally high in autumn 2023. At the end of October 2023, they reached 1.97 %, their highest level in more than 11 and a half years. This was similar to the level in April 2009 (starting point of the time series for the euro area).[17] However, key interest rates in autumn 2023 were significantly higher than they had been back then because in April 2009, the majority of the key interest rate cuts had already been implemented. The fact that, measured in terms of key interest rate levels, funding costs were not higher in 2023 is due largely to the fact that – as in Germany – the share of the funding mix attributable to deposits of the private non-financial sector was substantially higher in autumn 2023. In addition, these were remunerated at very low interest rates. At the same time, as was also the case for banks in Germany, the share of the now more expensive funding via securitised liabilities was smaller in previous years than it was at that time.

The weaker increase in the FCI in 2022‑23 as compared to 2008 can be explained by structural changes. The financial crisis, coupled with the previous monetary policy tightening, was largely responsible for the FCI rising to such a high level in 2008. Both factors pushed the FCI up, especially on the back of short-term interest rate and yield increases. But why did the FCI in 2023 end up so far below the level in 2008, especially since the extent and pace of monetary policy tightening in 2022‑23 were unprecedented in historical terms? While the financial crisis intensified the rise in the FCI in 2008, there were a number of factors in 2022‑23 that had a structurally dampening effect on the increase in the FCI. In the next part of this article, the effects of the financial crisis, monetary policy and other factors on the difference in the level of the FCI in 2008 and 2023 are examined in more detail. It not only explains the reasons for changes in prices, but also why the structure of banks’ financing mix has changed.

5 The FCI in 2008 and 2023: structural differences and their causes

In addition to standard monetary policy – that is, adjustments to key interest rates, which have a short-term impact on the FCI – there are other factors that shape its development. These factors may be short-term or long-term in nature and may either raise or dampen the level of the FCI. The global financial crisis had an impact on the FCI over a relatively short period of time, but this impact stemming from increased risk premia was highly significant. By contrast, non-standard monetary policy measures had the effect of dampening the FCI over a fairly long period. On the volume side, other factors of a structural nature impacted the FCI level by affecting how funding was composed, especially the shares of deposits and securitised liabilities in the financing mix. These volume-based factors had the effect of almost exclusively dampening costs in the FCI in the period observed here (see Chart 2.11).

The global financial crisis was the main factor that drove funding costs to a record high in 2008. Mistrust among financial market participants increased dramatically after the subprime crisis spilled over into the money market in the summer of 2007, and the collapse of Lehman Brothers in September 2008. Consequently, the risk premia on market-based sources of funding rose sharply, and money and capital market financing became significantly more expensive. A financial crisis ensued. This contrasts with a broadly stable financial system in 2022‑23. Although there were increased risks to financial stability, especially in 2022,[18] this was caused by higher uncertainty in the markets stemming from geopolitical tensions, in particular the war in Ukraine, as well as rising energy prices and persistent supply chain issues. In addition, rising inflation rates and subsequent interest rate hikes by the Eurosystem pushed up funding costs for enterprises and households, thereby contributing to tighter financial conditions. In spite of these challenges, supported by banks’ robust capital and liquidity buffers, the financial system in the euro area proved resilient overall.[19]

A further reason why the FCI was relatively high in the period prior to the financial crisis is that the yield curve at that time was still sloping upwards, whereas it had already inverted again in 2023 (see Chart 2.13). In 2008, the market was not expecting the sudden interest rate cuts that were soon necessitated by the financial crisis. This explains why long-term interest rates were higher than short-term interest rates. By contrast, in 2023, following extensive monetary policy tightening measures, the market quickly began to expect interest rates to be cut, which meant that long-term interest rates had already begun to decline again at the end of 2023. This is because the level that key interest rates had reached seemed comparatively high, as the period of low interest rates was still prominent in people’s minds. This was due to the extensive monetary policy measures implemented in the previous decade.

Evolution of the yield curve*

The most recent increase in the FCI occurred after a sustained period of negative interest rates, which started from a historically low level. In the aftermath of the financial crisis, there was a long-term decline in the general level of interest rates. Faced with the financial crisis and the European sovereign debt crisis, the ECB Governing Council cut key interest rates to unprecedented levels. Low rates of inflation in the years that followed prompted the ECB Governing Council to adopt further monetary policy measures. Thus, the interest rate on the deposit facility was lowered into negative territory in June 2014. Short-term market interest rates subsequently also dropped to negative levels. In addition, the ECB Governing Council adopted further non-standard measures, such as the APP, with the aim of flattening the yield curve at the long end, too. The ECB Governing Council also implemented measures to directly reduce banks’ funding costs. These included TLTRO I, TLTRO II and TLTRO III. These measures led to the FCI declining to one unprecedented low after another amid a general decline in interest rates and yields. It fell to its lowest level to date in August 2021. This means that its starting level at the end of 2021 was also significantly lower than it was when monetary policy tightening began in 2005.

The lower general level of interest rates was reflected in all components of the FCI; however, interest rates on the deposits of other financial corporations and the yields on securitised liabilities saw a particularly sharp decline. That said, interest rates on deposits of households and non-financial corporations in the euro area were also noticeably lower at the end of 2021 than they had been at the beginning of the financial crisis, hovering at historically low levels. The decline in the aggregated deposit interest rate was also intensified by volumes shifting towards overnight deposits, which are generally remunerated at lower interest rates than time deposits.

The FCI also fell between 2008 and 2023 as a result of volume shifts triggered by monetary policy and regulatory measures, and consisted of reallocations away from market-based funding towards deposit-based funding. The supplementary information on the impact of monetary policy and regulatory measures on banks’ funding mix shows that the share of deposits in the financing mix increased between 2008 and 2023 for a number of reasons. These include the non-standard monetary policy measures such as the APP, the PEPP and the TLTROs. The purchase of assets by the Eurosystem and the increase in lending that the measures were intended to achieve coincided with a rise in deposits. This growth in deposits was further supported by the fact that, unlike alternative forms of investment, bank deposits rarely bore negative interest, which made them more attractive for depositors. From a regulatory point of view, the implementation of mandatory liquidity requirements (liquidity coverage ratio (LCR) and net stable funding ratio (NSFR)) provided incentives for banks to increase the share of deposits of households and small and medium-sized enterprises in their financing mix. This is because these kinds of deposits are regarded as a fairly stable source of funding and are therefore accorded a privileged status when calculating liquidity ratios. The volume shifts in the financing mix towards deposits came mainly at the expense of securitised liabilities, which, up until the onset of the financial crisis, had a much greater weighting in the financing mix than they did in recent years. Their greater weight at the time was the result of a wave of liberalisation, the core elements of which strengthened the significance of capital market financing via bank bonds and institutional investors, above all for large banks and Landesbanken. After the financial crisis, the non-standard monetary policy measures also served to make capital market financing less attractive. More recently, however, regulatory requirements for loss-absorbing capacity and the scaling back of non-standard monetary policy measures have once again boosted the significance of securitised liabilities in the financing mix.

The impact of monetary policy and regulatory measures on banks’ funding mix

Compared with 2008, the level of funding costs – as measured by the financing cost indicator (FCI) of banks in Germany depicted in Chart 2.11 – was lower in 2023, also due to volume shifts in the funding mix of banks. From 2008 to 2023, the funding mix underwent a significant shift – away from market-based financing and towards customer deposits (see the centre of Chart 2.11). This supplementary information addresses the extent to which monetary policy and regulatory measures have contributed to the change in the financing structure of banks.

Customer deposits held with banks grew markedly from 2008 onwards as a result of an increasingly expansionary monetary policy stance and its positive impact on lending (see Chart 2.14). Expansionary monetary policy measures – such as the declining key interest rates in the euro area between 2008 and 2019 – generally affect the volume of deposits at banks: if the central bank reduces its policy rates, banks’ financing costs generally fall. Banks usually pass on reduced financing costs to their customers by lowering the interest rates on the loans they offer.[1] Demand for loans usually rises as lending rates fall, and lending increases.[2] As banks create new book money in the form of overnight deposits when lending, a rise in lending is accompanied by growth in deposits.[3] Non-conventional monetary policy measures, such as asset purchase programmes and longer-term refinancing operations, can also cause deposits to grow owing to an increase in banks’ lending. When assets are purchased by the central bank, this may result in an immediate increase in deposits, because if the central bank purchases a security from a domestic non-bank, payment of the purchase price is usually settled via the bank managing the seller’s account. The seller’s deposits increase as a result of the purchase amount being credited to the seller’s account.[4]

Deposits from the euro area private non-financial sector with banks in Germany

The de facto zero lower bound for overnight deposits, especially for households, also contributed to the increase in deposits. For instance, the Eurosystem’s policy rate cuts and asset purchase programmes led to a decline in the general level of interest rates and yields.[5] However, for households’ overnight deposits, which constitute the largest share of bank deposits in the private non-financial sector, the decline in interest rates effectively came to a halt at the zero lower bound. This was because banks were reluctant to pass on negative interest rates to their depositors, particularly in the case of households.[6] As a result, the yield spread narrowed between investments that usually have higher returns and bank deposits. Accordingly, it became more attractive for households to hold their financial resources in overnight bank deposits. On top of this, households have repeatedly been exposed to high uncertainty since 2008. Households’ already relatively high risk aversion is likely to have increased since price swings in capital markets picked up during the global financial crisis and the European sovereign debt crisis.[7] In addition, uncertainty about economic developments during the pandemic and after the outbreak of the Russian war of aggression against Ukraine grew.[8] For these reasons, too, it became more attractive for households to park freed-up funds in liquid investments or forms of investment perceived to be low-risk, such as bank deposits.[9][10] However, the de facto zero lower bound for deposits meant that these deposits, which had been comparatively favourable at other times, were now a relatively expensive source of financing for banks. As the period of negative interest rates grew longer, some banks therefore tried to limit inflows of deposits by applying negative interest rates to deposits above a certain amount, for example.

Changes to liquidity regulations are also likely to have contributed to deposit growth in the funding mix of banks. The financial crisis showed that short-term large-volume deposits by institutional investors[11] may be withdrawn quickly by depositors in periods of heightened uncertainty. This can lead to liquidity shortages among banks. As a result, supervisors and regulators set themselves the goal of making banks’ funding less vulnerable to unexpected liquidity outflows and ensuring banks’ solvency at all times. Minimum requirements were therefore introduced as part of liquidity regulation. One of these requirements involved a liquidity buffer that banks are required to hold for periods of stress (liquidity coverage ratio, LCR), whilst another concerned the ratio between the maturity structures of lending and deposit business (net stable funding ratio, NSFR). The deposits of households and small and medium-sized enterprises are privileged when calculating the LCR and the NSFR. This is because, unlike deposits from larger enterprises, individual deposits are often amounts that are fully covered by the statutory deposit insurance scheme. They are therefore considered to be a relatively stable source of funding.[12] Taken by itself, this provides incentives for banks to acquire or hold such deposits.

The volume shifts in the funding mix towards deposits were mainly at the expense of securitised liabilities: these had had a significantly greater weight in the funding mix in the years up to the outbreak of the financial crisis than more recently. The blue bars in Chart 2.15 show that the share of bank debt securities stood at around 30 % between 2004 and 2008. This high level was the outcome of a wave of liberalisation, the core elements of which were the financial market promotion legislation of the 1990s. The Third Financial Market Promotion Act, in particular, paved the way for forms of financing such as bank debt securities, created a broader investor base and thereby strengthened the importance of capital market financing, especially for big banks and Landesbanken.[13] As the chart shows, the outstanding volume of bank debt securities and their share in the funding mix are currently significantly lower than they were back then.

Bank debt securities issued by banks in Germany

The decline in the use of debt securities as a financing instrument was initially due to the deteriorating environment for issuing new instruments in the capital market following the financial crisis; later on, favourable funding opportunities via the central bank encouraged banks to move away from capital market financing. During the global financial crisis, investors were more focused on counterparty and liquidity risk than before. The increased risk perception resulted in higher risk premia and a deterioration in sales opportunities for unsecured bank bonds. The sharp rise in investors’ risk appetite between the period of liberalisation and the financial crisis was also corrected. To ensure banks’ access to funding despite a dysfunctional interbank market, in October 2008, the implementation of monetary policy switched to fixed rate tenders with full allotment and the main refinancing rate was reduced from 3.25 % to 0.25 % by May 2009. Compared with central bank financing, funding via the capital market became increasingly unattractive for banks.[14] This was reinforced from 2014 onwards by the three series of targeted longer-term refinancing operations (TLTROs) with maturities of up to four years, partly replacing the issuance of bank debt securities.[15] Studies also suggest that, in the long term, monetary policy purchase programmes (in particular the three covered bond purchase programmes) adversely affected trading in covered bank bonds and thus their attractiveness as a source of financing for banks.[16]

By contrast, regulatory requirements to strengthen banks’ loss absorbing capacity and the discontinuance of special monetary policy programmes have recently reinforced the importance of securitised liabilities in the funding mix. One of the responses to the financial crisis was to implement regulatory minimum requirements for loss-absorbing liabilities in order to bolster the credibility of a resolution regime. Following the requirements outlined in 2015‑16 and the adoption of the banking package in 2019,[17] the need for banks to return more strongly to financing through bank debt instruments became apparent. The fact that most of the third and final series of the Eurosystem’s TLTROs were repaid in 2023 and 2024 is also likely to have amplified this.[18] According to the EBA Funding Plans of 2021 and 2023, banks therefore increasingly planned to carry out any refinancing that might become necessary using market-based financing instruments. The share of securitised liabilities in their funding mix has therefore risen again recently. However, the impact of the increase on FCI has so far been small. For example, the FCI would only be slightly lower if it were assumed that, all other things being equal, the volume of securitised liabilities had remained unchanged since 2022.[19]

See Deutsche Bundesbank (2023a).
For further information on transmission channels, see Deutsche Bundesbank (2017), pp. 27f.
See Deutsche Bundesbank (2017).
The reduction in investment opportunities caused by the purchase programmes is also likely to have contributed to the increase in deposits. With the Eurosystem purchasing large volumes of bonds from 2015 onwards, this meant they were no longer available to households on the market. As a result, they had fewer alternative forms of investment available to them and this, too, is likely to have boosted the rise in deposits.
See Deutsche Bundesbank (2017), p. 28.
See Bittner et al. (2022), Heider et al. (2019), Kerbl and Sigmund (2016) and Deutsche Bundesbank (2020).
See Deutsche Bundesbank (2015b), pp. 26‑31.
The share of currency and deposits in households' total financial assets rose in the wake of the financial crisis and stood almost continuously above 50 % between September 2014 and June 2021. Households built up currency and deposits mainly at the expense of any debt securities they held.
Government bonds, which households had traditionally invested in frequently in the past, were then purchased and held on a larger scale by the Eurosystem.
Uncertainty also led non-financial corporations to step up their overnight deposits. However, their share in the volume of deposits in the private non-financial sector rose from 11 % to 16 % between September 2008 and October 2023, whereas households’ share of overnight deposits increased from 26 % to 49 % over the same period.
These deposits are generally not covered by the deposit insurance scheme.
Banks in the European Union have been required to comply with the LCR as a binding minimum level since 1 October 2015. The NSFR was introduced via amending Regulation 2019/876 (CRR II). It has been binding with a compliance level of 100 % since 28 June 2021.
See Deutsche Bundesbank (2015a), pp. 38ff.
See Deutsche Bundesbank (2015a) and European Central Bank (2018), box 7.
Fudulache and Götz (2023) find that TLTROs caused banks in the euro area to substitute market funding.
See Weigerding (2023).
From the end of 2015 and the start of 2016, the requirements that could emerge from the TLAC standards for global systemically important banks and from MREL for European banks on an institution-specific basis were fleshed out (see Deutsche Bundesbank (2016)). As a result, banks signalled back in 2017 that they were again increasingly planning to issue uncovered/unsecured or even subordinated (i.e. non-preferred) bank debt securities. As the adoption of the banking package in 2019 grew closer, details on the eligibility of bank securities for inclusion in the loss-absorbing capacity were revised and subordination requirements were clarified (see Deutsche Bundesbank (2019)).
See European Central Bank (2024).
The impact on the FCI would also be small if, instead of volume, the share of securitised liabilities in banks’ funding mix were kept constant.

The reasons presented demonstrate that both price factors and factors affecting the structure of financing contributed to the difference in the level of the FCI in 2023 as compared to 2008. Consequently, it is not surprising that the FCI, measured in terms of the key interest rate level, is now significantly lower than in 2008. As a result of these wide-ranging structural changes, the FCI is not expected to fully return to the levels seen prior to the financial crisis.

6 Assessment of current situation and conclusion

Banks’ funding costs have fallen only slightly so far from their peak in autumn 2023. The monetary policy measures to cut interest rates adopted since June 2024 have merely had a small impact on the FCI. Although money market interest rates and yields on securitised liabilities have declined, the aggregated rate on deposits of the private non-financial sector in the euro area has changed little thus far. In a setting of declining key interest rates, banks are quicker to pass on rate cuts in their deposit business than they are to pass on key interest rate increases.[20] However, the effect of lowering interest rates is being counteracted by the sustained volume shift towards time deposits, which are remunerated at higher interest rates.

The increased share of deposits in the financing mix means that banks are able to exert a substantial influence on a larger portion of their funding costs. This potentially complicates any assessment of how monetary policy impulses are transmitted to banks’ funding costs and ultimately to lending rates. However, Bundesbank analyses show that the transmission of changes in market interest rates to deposit rates is currently functioning in the same way that historical correlations in the period up to autumn 2023 would suggest.

In addition to deposits, financing in money and capital markets remains a key source of funding for banks, even if it is not currently as significant as it was in the period leading up to the financial crisis. The financial crisis showed that prices in money and capital markets can change quickly and significantly in the event of disruptions. For the most part, banks operate in these markets as rate takers, which means they exert little influence on prices. Nevertheless, price developments play an important role for the FCI because financing via money and capital markets continues to make up a material share of banks’ financing mix. However, unlike prices, banks can, conversely, steer the volume of the debt securities that they issue comparatively well. The extent to which they are able or willing to make use of this source of financing depends on monetary policy, regulatory requirements and other structural factors. In recent years, banks have once again been raising more of their funding in the market. This development is likely to continue, given the final repayment in December 2024 of the funds taken up under TLTRO III and the scaling back of the monetary policy portfolio.

Developments in bank financing costs are of key importance for monetary policy because only a comprehensive picture can enable valid conclusions to be drawn about the transmission of monetary policy impulses. The FCI is a useful tool in this regard because it provides valuable supplementary information in a concise way. This is because it also takes shifts in banks’ financing mix into account. These shifts can lead to a change in the cost of funding even if the prices of the individual sources of funding do not change.

List of references

Bank of England (2014), Bank funding costs: what are they, what determines them and why do they matter? Quarterly Bulletin, 2014 Q4.

Bittner, C., D. Bonfim, F. Heider, F. Saidi, G. Schepens and C. Soares (2022), The augmented bank balance-sheet channel of monetary policy, Deutsche Bundesbank Discussion Paper, No 22/2022.

Deutsche Bundesbank (2024), The performance of German credit institutions in 2023, Monthly Report, September 2024.

Deutsche Bundesbank (2023a), Developments in bank interest rates in Germany during the period of monetary policy tightening, Monthly Report, June 2023.

Deutsche Bundesbank (2023b), Financial Stability Review 2023.

Deutsche Bundesbank (2022), Financial Stability Review 2022.

Deutsche Bundesbank (2020), Developments in the German banking system during the negative interest rate policy period, Monthly Report, October 2020.

Deutsche Bundesbank (2019), The European banking package – revised rules in EU banking regulation, Monthly Report, June 2019.

Deutsche Bundesbank (2017), The role of banks, non-banks and the central bank in the money creation process, Monthly Report, April 2017.

Deutsche Bundesbank (2016), Bank recovery and resolution – the new TLAC and MREL minimum requirements, Monthly Report, July 2016.

Deutsche Bundesbank (2015a), Structural developments in the German banking sector, Monthly Report, April 2015.

Deutsche Bundesbank (2015b), German households’ saving and investment behaviour in light of the low-interest-rate environment, Monthly Report, October 2015.

Drechsler, I., A. Savov and P. Schnabl (2021), Banking on Deposits: Maturity Transformation without Interest Rate Risk, Journal of Finance, Vol. LXXVI, No 3, pp. 1091‑1143.

European Central Bank (2024), The use of the Eurosystem’s monetary policy instruments and its monetary policy implementation framework in 2022 and 2023, Occasional Paper Series, No 355.

European Central Bank (2023), Financial Stability Review, November 2023.

European Central Bank (2022), Financial Stability Review, November 2022.

European Central Bank (2021), Monetary policy decisions, press release, 16 December 2021.

European Central Bank (2018), Financial Stability Review, November 2018.

Fudulache, A.-E. and M. R. Goetz (2023), Long-term deposit funding and demand for central bank funds: Evidence from targeted longer-term refinancing operations, Deutsche Bundesbank Discussion Paper, No 12/2023.

Heider, F., F. Saidi and G. Schepens (2019), Life below Zero: Bank Lending under Negative Policy Rates, The Review of Financial Studies, 32 (10), pp. 3728‑3761.

Illes, A., M. Lombardi and P. Mizen (2015), Why did bank lending rates diverge from policy rates after the financial crises?, BIS Working Paper No 486.

Kerbl S. and M. Sigmund (2016), From low to negative rates: an asymmetric dilemma, Oesterreichische Nationalbank, Financial Stability Report 32, pp. 120‑135.

Weigerding, M. (2023), Long-term liquidity effects of large-scale asset purchase programs: Evidence from the euro covered bond market, International Review of Economics and Finance, Vol. 87, pp. 244‑264.

See Deutsche Bundesbank (2023a).
See Bank of England (2014).
Illes et al. (2015) also calculate this kind of indicator by determining funding costs as the volume-weighted average of the interest rates on new business and applying the shares of the respective balance sheet items in total assets as the volume weighting.
In contrast to this, an “average” FCI can also be calculated. See the supplementary information on the construction of the FCI.
First, banks have a certain power when it comes to setting prices, especially for households. Second, the bulk of the deposits consists of overnight deposits, which are held more for liquidity rather than for investment purposes, meaning that yields play a less important role for households than in the case of alternative investments. See Deutsche Bundesbank (2023a).
Deposits of non-banks outside the euro area and deposits of banks outside Germany.
The price of this FCI component is approximated using the twelve-month EURIBOR. This stood at 2.5 % at the end of October 2024.
On 16 December 2021, the ECB Governing Council announced a step-by-step reduction in net asset purchases under the purchase programmes; see European Central Bank (2021). In addition, the targeted longer-term refinancing operations (TLTRO III) were discontinued after the tenth and final operation was allotted in December 2021.
The pass-through of interest rates on time deposits is usually swift and virtually complete because time deposits are in competition with other longer-term investment options. By contrast, overnight deposits are held principally for payment as opposed to investment purposes. The pass-through of interest rates on these deposits is both sluggish and incomplete. Bundesbank analyses show that during the period of monetary tightening, banks passed on the increase in market interest rates to overnight deposits to a lesser extent than historical correlations would suggest. One reason for the weaker-than-expected interest rate pass-through could be an asymmetric interest rate pass-through that is dependent on the stage in the interest rate cycle. Another reason could be the significantly higher volume of these deposits. See Deutsche Bundesbank (2023a).
Bank liabilities to the Bundesbank excluding funds taken up under the TLTROs made barely any contribution to the increase in the FCI. As assumed, the price of these liabilities was approximated using the main refinancing rate. Although this rate rose by 250 basis points, at 0.1 % their average volume share was marginal.
The rise in the heterogeneity of interest rates on overnight deposits across all banks and the fairly substantial interest rate hikes by individual banks indicate that competition for deposits intensified (see Deutsche Bundesbank (2023a)).
Apart from the period of tightening in 2022‑23, there have been two additional periods of tightening since the single currency was introduced, both of which saw key interest rates at a comparable level when the series of interest rate hikes came to an end. The first period began in November 1999 and ended in 2001. However, a comparison with this period of tightening is not possible because the FCI time series does not begin until 2003. The second period began in December 2005 and ended in July 2008.
The FCI also rose in 2011 on the back of interest rate increases. However, these rate hikes occurred only briefly, over a period of four months, and at 50 basis points, the increases themselves were modest. The increase in the FCI was similarly low.
The reasons for the change in banks' funding structure are discussed in the next part of the article.
See Deutsche Bundesbank (2024). In principle, changes in banks’ funding costs only have an impact on interest expense following a certain delay because of what can sometimes be lengthy interest rate fixation periods. The interest expense is recognised in the banks' income statements and calculated on the basis of outstanding volumes and interest rates. In particular, rapid price changes in new business, such as the decline in interest rates during the financial crisis and the rise in interest rates in 2022‑23, have a direct impact on the FCI, while the income statement is initially only affected to a limited extent since it focuses on the bank's overall business, and not solely on new business.
Calculated analogously to the FCI as the average of the aggregated new business interest rates for loans to non-financial corporations, consumer credit to households and housing loans to households, weighted by outstanding volumes.
The Centralised Securities Database (CSDB) time series used in the pricing of the securitised liabilities of euro area banks does not start until April 2009.
See Deutsche Bundesbank (2022) and European Central Bank (2022).
See Deutsche Bundesbank (2023b) and European Central Bank (2023).
For the asymmetry in the transmission of interest rates, see Deutsche Bundesbank (2023a), pp. 56 f.

Forecast for Germany: Significantly gloomier growth outlook – inflation decreases to 2% Monthly Report – December 2024