Abstract
We show that losses on banks’ securities portfolios impair monetary policy transmission through a collateral channel, even when banks remain well capitalised. Using granular euro area data on securities holdings, interbank transactions, and firm-bank credit relationships, we find that banks suffering larger valuation losses obtain significantly less repo funding, and subsequently reduce corporate lending. A one-standard-deviation increase in securities losses is associated with a 3.8% decline in interbank borrowing and a 2.5% decline in lending to firms. Internal capital markets within banking groups partially offset these effects, but only for domestic subsidiaries. Foreign subsidiaries are left exposed, pointing to incomplete banking integration along national lines. These findings reveal a collateral-based bank lending channel of monetary policy that operates independently of bank capital constraints.