Published as part of the Financial Stability Review, May 2025.
Banks’ deposit franchises can act as a stabilising force in the banking system by supporting profitability and containing interest rate risk. The value of a bank’s deposit franchise is defined as the long-term present value of its earnings from attracting and retaining low-cost and stable deposit funding, minus any operating expenses incurred (e.g. due to operating branches and marketing expenses). In providing steady, low-cost funding, strong deposit franchises are a key source of bank profitability and, as such, have contributed to the recent surge in profitability. They also help banks to manage interest rate risk in a volatile interest rate environment, as changes in the economic value of a bank’s deposit franchise can offset valuation changes in long-term fixed-rate assets. High deposit franchise values may also reduce banks’ risk-taking incentives and moral hazard by representing an economic asset that banks aim to protect, potentially resulting in higher market valuations.[1]
The interest rate environment is the key determinant of the deposit franchise value.[2] Customers deposit cash with banks as they provide safety, liquidity and access to cashless payments (the “deposit franchise”). Their deposits are remunerated at rates that are both low and relatively insensitive to market interest rates. This allows banks to earn a spread between market rates and deposit rates that generally increases with the market rate. Banks’ operating expenses do not vary much over time and are therefore also insensitive to interest rates. This means that the value of a bank’s deposit franchise is higher when interest rates are high. During the low-for-long interest rate environment, the deposit franchise was a liability in economic terms for virtually all euro area banks (Chart A, panel a) as they were unable to generate a spread income in excess of their operating expenses.[3] The exit from the low interest rate environment pushed the deposit franchise value back into positive territory, turning it into an economic asset. The negative modified duration of the deposit franchise value protected banks from the interest rate risk stemming from unrealised losses on long-term fixed-rate assets. Across the euro area, positive deposit franchise values have been observed when long-term interest rates have exceeded 1.8%.
Chart A
The deposit franchise value changes with the interest rate environment, the degree of market concentration and operating expenses
a) Deposit franchise value distribution across banks and euro area long-term interest rate | b) Market concentration and deposit franchise value, by country | c) Bank market share and operating expenses, by deposit franchise value quartile |
|---|---|---|
(July 2007-Dec. 2024; left-hand scale: value per euro of deposits, right-hand scale: percentages) | (2007-24; x-axis: index, y-axis: value per euro of deposits) | (2007-24, percentages) |
 |  |  |
Sources: ECB (supervisory data, MIR, BSI, SSI) and ECB calculations.
Notes: Changing sample over time of 88 significant institutions. Cost estimates are only available as of Q4 2014 and are backward-filled over the entire time frame. Panel b: the country-specific yearly concentration (Herfindahl) index for credit institutions’ total assets is available up to 2023 and forward-filled for 2024. For further explanations on the underlying methodology, see Guideline 2021/830 of the European Central Bank on balance sheet item statistics and interest rate statistics of monetary financial institutions (ECB/2021/11). Long-term median over the entire time frame for countries with more than three banks. Panel c: long-term median over the entire time frame and sample. “Unit cost of deposits” refers to the operating expenses associated with each euro of deposits, while “market share” refers to individual banks’ share of total assets in a given country.
Higher market concentration, market power and cost efficiency are associated with higher deposit franchise values. Banks in countries with more concentrated banking sectors (Greece and Cyprus) tend to have higher deposit franchise values than those in less concentrated markets (Germany, France and Austria) (Chart A, panel b). Higher market concentration is often associated with a lower pass-through of interest rate changes to deposit rates[4] which is linked to the prevailing level of competition for deposits[5]. The relationship is also visible at the individual bank level, as banks with larger market shares, and hence greater market power, have higher deposit franchise values (Chart A, panel c). Another factor that contributes to the differences in banks’ deposit franchise values is cost efficiency. For example, banks with lower unit operating expenses require a lower deposit spread income to achieve a positive deposit franchise value.
Banks with higher deposit franchise values are more attractive to investors. Higher deposit franchise values are also associated with higher market valuations, across both time and banks. Since 2008 banks’ average deposit franchise values and average price-to-book ratios have followed similar patterns (Chart B, panel a). This positive relationship also holds at the cross-sectional level, as banks with higher deposit franchise values receive higher valuations from investors (Chart B, panel b). This is relevant in terms of financial stability, as weak valuations can impede the ability of banks to raise capital and provide credit to the real economy.
Chart B
Higher deposit franchise values are associated with higher market valuations
a) Average deposit franchise value and price-to-book ratio | b) Market valuations and deposit franchise value |
|---|---|
(Q1 2008-Q4 2024; left-hand scale: percentages, right-hand scale: value per euro of deposits) | (Dec. 2024; x-axis: value per euro of deposits, y-axis: percentages) |
 |  |
Sources: ECB (supervisory data, MIR, BSI), Bloomberg Finance L.P. and ECB calculations.
Notes: Panel a: a changing sample of 42 listed significant institutions over time. Panel b: a comparison of market valuations and deposit franchise values for a sample of 26 listed significant institutions.
The value of euro area banks’ deposit franchises has important implications for financial stability in the euro area. Banks provide services to customers in the form of security, short-term liquidity and cashless payment systems. In return, as the only deposit-taking institutions in a sector with high barriers to entry, they benefit from the incomplete pass-through of interest rate changes to deposit funding costs and low customer deposit remuneration. In this context, a sustainable and profitable deposit franchise acts as a stabilising force in the banking system. This business model does, however, entail the risk of deposit runs in the event of a confidence shock.[6] Moreover, greater competition in the deposit market or greater household participation in financial markets, instead of placing savings with banks directly, could put pressure on deposit franchise values. Understanding the differences and dynamics of the deposit franchise value is important for the assessment of banks’ interest rate risk exposures and market valuations.
See (i) Drechsler, I., Savov, A. and Schnabl, P., “Banking on Deposits: Maturity Transformation without Interest Rate Risk”, The Journal of Finance, Vol. 76, No 3, February 2021, pp. 1091-1143; (ii) Drechsler, I., Savov, A. and Schnabl, P., “How to value the deposit franchise”, New York University Stern School of Business, 2023; (iii) Drechsler, I., Savov, A., Schnabl, P. and Wang, O., “Deposit Franchise Runs”, Working Paper Series, No 31138, National Bureau of Economic Research, April 2023; (iv) DeMarzo, P.M., Krishnamurthy, A. and Nagel, S., “Interest Rate Risk in Banking”, Working Paper Series, No 33308, National Bureau of Economic Research, December 2024; (v) Demsetz, R.S., Saidenberg, M.R. and Strahan, P.E., “Banks with Something to Lose: The Disciplinary Role of Franchise Value”, Economic Policy Review, Vol. 2, No 2, Federal Reserve Bank of New York, October 1996, pp. 1-14; and (vi) Kwan, S. and Martinez, Z., “Bank Franchise as a Stabilizing Force”, Economic Letters, No 2024-20, Federal Reserve Bank of San Francisco, August 2024.
The analysis in this box estimates the deposit franchise value for a sample of euro area banks. Following the approaches proposed by Drechsler et al. (see (ii) and (iii) in footnote above) and DeMarzo et al. (see (iv) in footnote above), a bank’s deposit franchise value can be computed as the present value of a ten-year discounted cash flow of the difference between the deposit spread income and the operating expenses of the deposit franchise. The deposit spread income is a hypothetical profit that banks can earn by borrowing at the deposit rate and placing funds in the money market at the risk-free overnight rate. Estimates for bank-level deposit betas, fixed deposit spreads and the costs of deposit provision as a share of operating expenses are used as inputs. Model inputs are derived from a regression of individual banks’ deposit rates on the euro short-term rate, two-year swap spreads and five-year swap spreads. The euro area ten-year sovereign bond yield is used to discount cash flows and to proxy the long-run overnight money market rate, including a risk premium and a term premium.
While deposit spread income, in isolation, consequently did not contribute positively to bank earnings, the deposit franchise may still have generated indirect value, e.g. through customer relations providing opportunities for selling services, thus boosting fee income.
The deposit franchise value thus also partly reflects varying degrees of monetary policy transmission to deposits across euro area countries.
See Drechsler, I., Savov, A. and Schnabl, P., “The Deposits Channel of Monetary Policy”, The Quarterly Journal of Economics, Vol. 132, No 4, pp. 1819-1876, November 2017, and Kho, S., “Deposit market concentration and monetary transmission: Evidence from the euro area”, European Economic Review, Vol. 173, No 104933, April 2025.
The deposit franchise value is a function of the stickiness of deposits, which is affected by several factors, including digitalisation. In fact, digital banking can reduce the stickiness of deposits and influence the deposit franchise value of deposits, which may in turn have an impact on the stability of the banking sector. For further details on this topic, see Koont, N., Santos, T. and Zingales, L., “Destabilizing Digital ‘Bank Walks’”, Working Paper Series, No 32601, National Bureau of Economic Research, June 2024. For information on digital banking in the euro area, see the box entitled “Digital banking: how new bank business models are disrupting traditional banks” in this edition of the Financial Stability Review.