Key Takeaways
- Despite significant policy rate hikes since 2021, banks in advanced economies have been slow to increase the interest rates households earn on their savings.
- A new study using Icelandic data reveals that households, particularly wealthy and financially literate ones, are the primary drivers of deposit reallocation when interest rates change.
- Wealth appears to be a stronger determinant of savings allocation than interest rate differentials; wealthier individuals hold significantly less in low-yield accounts regardless of rate spreads.
- The cost of inaction (forgone interest income) is substantial, especially for wealthier households, comparable to welfare losses from investment mistakes in other financial markets.
- Standard macroeconomic models may overestimate the impact of monetary policy on household deposits due to underestimating the role of wealth and financial literacy in driving deposit behavior.
Understanding Household Deposit Behavior Amidst Rising Rates
In advanced economies, the substantial increase in policy rates since 2021 has not been mirrored by a corresponding rise in the interest rates offered to households on their savings. Banks, particularly in the US and Europe, have maintained persistently low deposit rates even during periods of aggressive monetary tightening. This dynamic prompts a critical question: do households actively move their funds to higher-yielding alternatives when policy rates climb, or do they largely leave their balances untouched? And for those who remain inactive, who are they, and how much income do they miss out on?
A new study, leveraging transaction-level data from Iceland encompassing approximately one-third of the adult population, offers insights into these questions. Iceland serves as an ideal environment for such analysis. All households have immediate and cost-free access to a variety of deposit products that are identical in terms of risk, maturity, and liquidity, but differ significantly in their interest rates. Transfers between accounts are instant via mobile app or internet banking. Despite this frictionless system, the research reveals considerable disparities in portfolio holdings and widespread inactivity. Crucially, it demonstrates that only affluent and financially knowledgeable households significantly adjust their portfolios in response to rising interest rates.
Wealth as a Primary Driver of Portfolio Allocation
What motivates households to reallocate their savings? The financial implications of suboptimal savings management are tied to both the amount of money households possess and the opportunity cost of keeping funds in low-yield accounts – essentially, the difference between what they earn and what they could potentially earn elsewhere. The study by Cirelli and Olafsson (2025) indicates that within the realm of liquid, short-term, safe assets, households adjust their portfolios based on changes in their wealth, rather than fluctuations in interest rate spreads.
- As households accumulate more wealth, they tend to keep a considerably smaller portion in low-yield accounts. The top wealth decile, for instance, allocates over 40 percentage points less to low-yield deposits compared to the bottom decile.
- Conversely, the average household shows a minimal reaction to changes in interest rate spreads. A one-percentage-point increase in the rate differential leads to a mere 0.1 percentage point reduction in the share held in low-yield deposits.
This lack of responsiveness is particularly noteworthy given that the assets in question are equally liquid, safe, and insured. Furthermore, the process of switching funds is instant and cost-free, meaning households forgo potential earnings even when making a change requires little more than a single tap on a mobile device.
Notes: The left panel displays the average portfolio shares across three liquid safe assets available to Icelandic households—checking, savings, and liquid funds (a money-market-type account)—stratified by wealth distribution. Over the sample period, interest rates on savings and liquid funds consistently outpaced those on checking deposits. The right panel shows the average portfolio composition across households, plotted against the interest rate on liquid funds (black line), which serves as a proxy for the spread between checking accounts and higher-yielding alternatives.
The Substantial Cost of Financial Inaction
The failure to act on savings decisions comes at a significant cost, particularly for wealthy households. Despite managing their investments more effectively on average, they still forgo considerable income by not moving their balances into higher-yielding accounts.
- On average, wealthier households achieve approximately two percentage points higher returns on their liquid, safe asset portfolios compared to less wealthy households.
- Nevertheless, they leave substantial amounts of money untapped. For the wealthiest decile, the forgone interest income is roughly equivalent to 2.5% of their annual consumption.
These figures are substantial, comparable to the returns households miss out on by not participating in stock markets or the welfare losses associated with under-diversification as documented in studies from Sweden. The key distinction here is that these losses occur without any compromise on risk, maturity, or liquidity, and within nearly identical financial products offered by the same institution on the same platform.
Notes: The left panel illustrates the average return on liquid, short-term safe assets based on wealth percentile. The right panel presents forgone interest income as a percentage of annual consumption expenditure.
Identifying the Drivers of Aggregate Deposit Movements
It is widely acknowledged that aggregate deposits tend to decrease when central banks tighten monetary policy. However, the question remains: who is actually moving these deposits? The answer lies in the significant heterogeneity among households.
- Wealthier households exhibit far greater sensitivity to rate changes. For every one-point increase in spreads, they reduce their low-rate deposit share by approximately one percentage point – nearly ten times the average response across the entire population.
- In contrast, the bottom 60% of households demonstrate little to no significant reaction.
- Beyond wealth, financial literacy and knowledge of inflation are important factors. Households with higher scores on survey-based measures of financial understanding are significantly more proactive in reallocating their assets.
Given that deposits are highly concentrated, with the top decile alone holding over 60% of all balances, these affluent and financially informed households are the primary catalysts for the aggregate flows that impact banks and policymakers. Therefore, comprehending fluctuations in aggregate deposits necessitates an understanding of the motivations and behaviors of these high-net-worth depositors.
Notes: This chart shows the predicted 12-month change in the share of checking accounts within core deposits, broken down by aggregate figures (left), the top wealth decile (center), and the fifth decile (right). Each change is decomposed into (i) the component attributable to interest-rate variables and (ii) the component due to other factors (wealth levels, group-specific trends, demographics). Interest-rate effects are calculated by varying only the interest-rate terms while keeping other covariates constant. For the top decile, which significantly influences aggregate trends, changes are almost exclusively driven by interest rate shifts. In contrast, for the fifth decile, most variation stems from other covariates rather than interest rate changes.
Challenging Conventional Economic Theories
How do these empirical findings align with standard macroeconomic theories commonly employed to analyze the transmission of monetary policy? The researchers constructed a model with two assets and incomplete markets, incorporating frictions in portfolio adjustment, following the approach of Auclert et al. (2020, 2025). These models include mechanisms that represent the difficulties in trading between assets with varying return profiles.
When calibrated to reflect the frequency of monthly account transitions, these models generally succeed in replicating the distribution of asset holdings across different households. However, they fall short where it matters most: they significantly overestimate households’ sensitivity to interest rate changes. In these models, rate hikes trigger substantial portfolio shifts, whereas the actual data shows minimal movement by households.
This discrepancy suggests that factors beyond standard adjustment frictions are at play, possibly including wealth-dependent inattention. For policymakers, the implication is clear: if economic models exaggerate the responsiveness of deposits, they will also likely overestimate the potency of monetary policy transmission through household portfolios to bank funding and lending activities.
Conclusion: Deposit Stickiness and Monetary Policy Effectiveness
The evidence gathered from bank transaction data strongly indicates that deposit stickiness is not primarily a technological issue. Even within one of the world’s most advanced digital banking ecosystems, characterized by frictionless and instantaneous transfers, households exhibit a muted response to interest rate incentives. The key drivers influencing aggregate deposit dynamics are identified as wealthy, financially literate households. These individuals not only tend to invest more efficiently on average but also hold the majority of balances, yet they still leave considerable unclaimed returns on the table.
The findings present a sobering message for policymakers: the transmission of monetary policy through household deposits is less potent and more uneven than conventional models suggest. For researchers, the challenge lies in integrating wealth- and knowledge-dependent frictions, or behavioral inertia, into models of household portfolio choice. Understanding deposit stickiness is therefore crucial, as it fundamentally shapes the effectiveness of monetary policy and the overall resilience of the banking system.
Expert Summary
This analysis of household savings behavior in Iceland reveals that even with swift and cost-free digital banking, deposit reallocation in response to rising interest rates is limited. Wealth and financial literacy emerge as far more significant drivers of these decisions than rate differentials alone. Wealthier, more informed individuals disproportionately influence aggregate deposit flows, yet even they forgo substantial interest income due to inaction, highlighting a potential weakness in monetary policy transmission mechanisms.