Securities losses reduce bank liquidity and tighten corporate credit
A new ECB research bulletin shows that securities losses during the 2022-23 tightening cycle reduced euro area banks' access to secured funding. This bank collateral channel drove a 2.5 percent decline in corporate lending.
Collateral constraints squeeze bank funding
During the 2022-23 interest rate tightening cycle, euro area banks lost on average 1 percent of total assets, or 12 percent of total equity, due to falling market values of fixed-income securities.
Using comprehensive supervisory data from the first quarter of 2022 to the third quarter of 2023, researchers found that these losses impaired banks' ability to obtain secured interbank funding.
Specifically, a one standard deviation increase in securities losses was associated with an almost 4 percent decline in interbank borrowing.
This collateral constraint operated independently of bank capital positions, affecting institutions with high collateral utilization and limited liquidity buffers most severely.
From balance sheet losses to credit crunches
Reduced liquidity access directly translated into a contraction in corporate credit supply.
Banks with larger securities losses reduced lending to firms by 2.5 percent, and affected institutions charged higher rates and offered shorter maturities.
While banking groups partially sheltered domestic subsidiaries through internal capital markets, cross-border liquidity transfers remained limited due to national fragmentation.
This highlights that collateral values represent an overlooked transmission channel for monetary policy across the euro area.
An overlooked transmission lever
The study exposes a blind spot in monetary policy models by proving collateral constraints bite before capital concerns arise.
Because cross-border liquidity sharing remains broken, these frictions amplify national divergences.
Completing the banking union is essential to ensure even policy transmission.