Security Losses, Interbank Markets, and Monetary Policy Transmission: Evidence from the Eurozone

Abstract

Banks that experienced larger losses in their pledgeable securities portfolios following the July 2022 monetary policy tightening became less able to borrow through the interbank market and subsequently reduced their corporate lending, regardless of whether the securities were booked at market or historical value. These effects were less pronounced for banks with abundant collateral and for domestic subsidiaries of banking groups, which received liquidity through their group’s internal capital market. Our results highlight a collateral channel in the bank-based transmission of monetary policy and show how differences in banking structure can contribute to an uneven transmission of monetary policy.

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