Monetary Policy Transmission Through Online Banks

Abstract

Financial technology has the potential to 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 a 100 basis points increase in the federal funds rate leads to a 30 basis points larger increase in the deposit rates of online banks relative to traditional banks.Consistent with the rate movements, online bank deposits experience inflows, while traditional banks experience outflows.Results are similar across markets with differing competitiveness and demographics, but vary with the stickiness of depositors.

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