The Impact of Monetary Policy on Bank Funding Composition: The Role of Deposit Market Regulation

In well-developed financial markets, wholesale funding comoves negatively with retail deposits in response to interest rate changes, thereby weakening monetary policy transmission. By contrast, our study finds that in economies such as China where deposit rate ceilings are regulated, (i) retail deposits and wholesale funding comove positively as the policy rate changes, and (ii) wholesale funding strengthens the transmission of the policy rate to bank lending. We develop a theoretical model underscoring the role of deposit market regulation for the impact of monetary policy on bank funding composition in the context of the world's largest emerging market economy.