The Eurozone deposit rates' puzzle: Choosing the right benchmark

- We build an alternative benchmark to the EURIBOR.
- We show that this benchmark is more relevant than the EURIBOR in explaining deposit rates in the Eurozone.
- Most of the seemingly over-remuneration of deposits in the Eurozone appears to be due to the use of the wrong benchmark.

This paper proposes an alternative benchmark to the EURIBOR to analyze the post-crisis puzzling behavior of deposit rates in the Eurozone. Using bank-level CDS data for 6 major Eurozone countries, we build a simple country-level index for banks' cost of unsecured funding. The use of this index instead of the traditionally used EURIBOR restores the cointegration relationship between deposit rates and their reckoned opportunity cost. It also suggests that deposits have actually not been significantly over-remunerated in most euro area countries since the financial crisis, in contrast to what is often argued.