European banks’ interest margins and monetary policy: Evidence of a stickiness phenomenon

This paper examines the liquidity transmission of European monetary policy by analyzing the changes in interest margins and their components for 194 banks from 2021Q1 to 2023Q3. The analysis shows an overall prompt response by banks to the rise in the ECB's main refinancing operations rate. However, this adjustment is asymmetrical, affecting interest expenses less and more slowly than interest income, thereby leading to a stickiness phenomenon. Further analyses reveal that the stickiness effect appears more pronounced in less efficient settings (e.g., bank-centric countries, populated by small banks and with low degree of financial literacy among adults). The overall findings suggest that the reaction of European banks maximises the beneficial effects of the monetary tightening on their income statements without compromising the pass-through of the ECB impulse. A more effective homogenization of the European markets could uniformise the response to monetary policy, levelling the playing field within the Union.