Title page 1

Contents 1

Abstract 2

Non-technical summary 3

1. Introduction 5

2. Data 8

2.1. Defining and identifying digital banks 9

2.2. Digital bank supervisory sample 10

2.3. Benchmark (non-digital) supervisory sample 11

2.4. BSI (MFI Balance Sheet Items) 11

2.5. Web-scraped deposit offer rates 12

2.6. Preparation of variables 12

3. Looking at digital banks in the euro area 13

3.1. Expansion and market structure 13

3.2. Digital banks' assets 14

3.3. Digital banks' funding 14

3.4. Income generation and expenditures 16

4. Digital banks in the monetary cycle 17

4.1. Bank interest rates 17

4.2. Funding, deposits and balance-sheet growth 18

5. Method 19

6. Results 20

6.1. Policy tightening, deposit and funding rates 20

6.2. Policy tightening and lending rates 21

6.3. Policy tightening and funding volumes 22

6.4. Assets and lending behaviour 23

7. Exiting the tightening cycle 23

7.1. Interest rates 24

7.2. Funding and asset volumes 25

8. Robustness 25

8.1. The role of competition 26

8.2. Sub-sample analysis 26

8.3. Relevance of activity 27

8.4. Alternative benchmark group 27

8.5. Variable transformations 27

9. Conclusions 28

References 31

Appendix 50

A. Appendix: Heterogeneity across digital bank types 50

B. Appendix: Robustness checks 53

C. Appendix: Additional information on deposit offer statistics 59

Acknowledgements 62

Tables 35

Table 1. Variable definitions and data sources 35

Table 2. Variable statistics 36

Table 3. Difference-in-Differences regressions for bank interest rates 46

Table 4. Difference-in-Differences regressions for deposit interest rates and funding spreads with a break-down of digital banks into... 46

Table 5. Difference-in-Differences regressions for funding spreads by duration 46

Table 6. Regressions of non-financial private sector loan interest rates on deposit rates 47

Table 7. Difference-in-Differences regressions for funding and asset volumes 47

Table 8. Difference-in-Differences regressions for retail funding volumes: covered and not covered by Deposit Guarantee Scheme 47

Table 9. Regressions of changes in volumes on changes in interest rates 48

Table 10. Staggered Difference-in-Differences regressions for interest rates and volumes 48

Table 11. Staggered Difference-in-Differences regressions for funding spreads by duration 48

Table 12. Difference-in-Differences regressions for offered deposit interest rates based on web scraping 49

Table 13. Difference-in-Differences regressions for deposit, assets and loan volumes: BSI data 49

Table 14. Difference-in-Difference regressions for interest rates and funding spreads with a break-down of digital banks by business model 50

Table 15. Difference-in-Difference regressions for deposit, funding, asset and loan volume growth with a break-down of digital banks by... 51

Table 16. Difference-in-Differences regressions for offered deposit interest rates based on web scraping with a break-down of digital banks... 51

Table 17. Difference-in-Difference regressions for deposit, assets and loan volume growth with BSI data and a break-down of digital banks... 52

Table 18. Difference-in-Difference regressions for interest rates: robustness with market shares and HHI 53

Table 19. Difference-in-Difference regressions for growth rates of volumes: robustness with market shares and HHI 54

Table 20. Difference-in-Difference regressions for interest rates: robustness to the split of sample into SIs and LSIs 55

Table 21. Difference-in-Difference regressions for growth rates of volumes: robustness to the split of sample into SIs and LSIs 55

Table 22. Difference-in-Difference regressions for interest rates: robustness to the split of sample into institutions reporting on a solo and... 56

Table 23. Difference-in-Difference regressions for growth rates of volumes: robustness to the split of sample into institutions reporting on a solo and... 56

Table 24. Difference-in-Difference regressions for interest rates and growth rate of volumes: robustness to weighting 57

Table 25. Difference-in-Difference regressions for interest rates and growth rate of volumes: matched sample 57

Table 26. Difference-in-Difference regressions for volume growth: robustness to transformations 58

Table 27. Difference-in-Difference regressions for volume growth in BSI data: robustness to transformations 58

Table 28. Deposit-offer coverage by country (bank-country pairs) 59

Table 29. Matched web-scraped versus MIR rates: levels and correlations 61

Figures 34

Figure 1. Share of adults using internet banking 34

Figure 2. Entries and exits of digital banks 34

Figure 3. Share of digital banks in the euro area banking system assets 37

Figure 4. Share of digital banks in national banking systems' assets, non-financial private sector loans and deposits 37

Figure 5. Break-down of digital bank total assets by systemic significance and business model 38

Figure 6. Asset concentration in digital bank segment 38

Figure 7. Assets and loans of digital compared to benchmark banks 39

Figure 8. Geographical dispersion of loans of digital compared to benchmark banks 39

Figure 9. Equity and liabilities as a share of total assets of digital compared to benchmark banks 40

Figure 10. Deposits and funding of digital compared to benchmark banks 40

Figure 11. Household deposits and retail funding of digital compared to benchmark banks 41

Figure 12. Income of digital compared to benchmark banks 41

Figure 13. Administrative expenses versus asset size of digital compared to benchmark banks 42

Figure 14. Household deposit rates and retail funding spreads over time: digital and benchmark banks 42

Figure 15. Lending rates for non-financial private sector over time: digital and benchmark banks 43

Figure 16. Return-on-assets of digital compared to benchmark banks 43

Figure 17. Deposit, funding, and asset growth in monetary policy windows 44

Figure 18. Dynamic Difference-in-Differences for household deposit rates and funding spreads 44

Figure 19. Dynamic Difference-in-Differences for deposit, funding, assets and loan volumes 45

Figure 20. Household deposit rates based on web scraping 45

Figure 21. Overnight deposit rates: web scraping versus MIR 60

Figure 22. Term/agreed maturity deposit rates: web scraping versus MIR 60