Bank Regulation Affects Monetary Policy Transmission

Greenwald, Daniel L.; Krainer, John; Paul, Pascal

Journal Article

Bank Regulation Affects Monetary Policy Transmission

Abstract: How does monetary policy impact banks’ lending behavior when interest rate changes revalue their securities? Detailed supervisory data show that banks with larger losses on securities during the 2022–23 monetary policy tightening cycle extended less credit to firms. This spillover effect was especially strong for securities that were marked to market and not hedged, and for banks required to include unrealized losses in regulatory capital. These conditions lead to larger reductions in corporate debt and investment, increasing monetary policy’s impact on the economy.