The heterogeneous bank lending channel of monetary policy

Jorge Abad, Galo Nuño, Saki Bigio, Salomon Garcia-Villegas and Joël Marbet

No 3299, Working Paper Series from European Central Bank

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. 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 suffer net interest margin compression—funding costs increase while legacy loan income stays unchanged—eroding capital and triggering sharper deleveraging. The lending elasticity to monetary policy is one-third larger 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. JEL Classification: E51, E52, G21, G28

Keywords: bank solvency; capital requirements; interest-rate risk; macroprudential policy (search for similar items in EconPapers)
Date: 2026-10
Note: 2253012
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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)
Working Paper: The Heterogeneous Bank Lending Channel of Monetary Policy (2026)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20263299

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