Hidden weaknesses: the role of unrealized losses in monetary policy transmission

Benedikt Kagerer, Cosimo Pancaro, Alessio Reghezza and Antonio De Vito

No 3129, Working Paper Series from European Central Bank

Abstract: This paper investigates how unrealized losses on banks’ amortized cost securities affect monetary policy transmission to bank lending in the euro area. Leveraging the sharp increase in interest rates between 2022 and 2023 and using granular supervisory data on security holdings and loan-level credit register data, we show that a one percentage point increase in the share of unrealized losses on amortized cost securities amplifies the contractionary effect of monetary tightening on lending supply by approximately one percentage point. This effect is more pronounced for weakly capitalized and less liquid banks, and those relying more on uninsured deposits. We further document that banks respond to growing unrealized losses by raising capital and passing through interest rate increases to depositors via higher deposit betas. Importantly, banks that employ interest rate hedging strategies can fully offset the negative impact of unrealized losses on credit supply. The contraction in lending is particularly severe for smaller borrowing firms, highlighting the uneven economic consequences of hidden balance sheet fragilities during a tightening cycle. JEL Classification: E43, E52, G21, G32, M41

Keywords: amortized cost accounting; bank lending; monetary policy transmission; security holdings; unrealized losses (search for similar items in EconPapers)
Date: 2025-10
Note: 1934813
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp3129~9d788ef5bc.en.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20253129

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().