The Heterogeneous Bank Lending Channel of Monetary Policy

Jorge Abad, Saki Bigio, Salomón García-Villegas, Joël Marbet and Galo Nuño Barrau
Additional contact information
Jorge Abad: EUROPEAN CENTRAL BANK
Saki Bigio: UCLA AND NBER
Salomón García-Villegas: CUNEF UNIVERSITY

No 2620, Working Papers from Banco de España

Abstract: How does heterogeneity in banks’ interest-rate risk exposure shape monetary policy transmission? We develop a quantitative macroeconomic model of heterogeneous banks to answer this question. We establish an irrelevance result: differences in interest-rate risk exposure between fixed- and variable-rate banking systems matter for transmission only when bank solvency concerns become relevant. By calibrating the model to the euro area, we show that idiosyncratic default risk pushes a substantial share of banks toward the solvency threshold, making heterogeneity quantitatively important. When policy rates rise, fixed-rate banks’ net interest margin is compressed – funding costs increase while legacy loan income stays unchanged – eroding capital and triggering sharper deleveraging. The elasticity of lending to monetary policy is one-third higher in fixed-rate economies. The effects extend to financial stability: tightening raises bank failure rates in fixed-rate systems while lowering them in variable-rate systems. The results provide a rationale for macroprudential and monetary policy coordination and for monetary policy gradualism.

Keywords: Monetary policy transmission; bank lending channel; heterogeneous banks; interest-rate risk; fixed-rate loans; variable-rate loans; bank solvency; bank capital; macroprudential policy; euro area (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 G21 G28 (search for similar items in EconPapers)
Pages: 86 pages
Date: 2026-07
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https://www.bde.es/f/webbe/SES/Secciones/Publicaci ... 26/Files/dt2620e.pdf First version, July 2026 (application/pdf)

Related works:
Working Paper: The Heterogeneous Bank Lending Channel of Monetary Policy (2026)
Working Paper: The Heterogeneous Bank Lending Channel of Monetary Policy (2026)
Working Paper: The Heterogeneous Bank Lending Channel of Monetary Policy (2026)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2620

DOI: 10.53479/44026

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