Fixed-rate lending amplifies credit contraction by one-third
A 100 basis point policy-rate increase reduces new lending about one-third more in fixed-rate than variable-rate systems in a European Central Bank (ECB) model. Working Paper 3299, published October 14, 2026, links the gap to banks near minimum capital requirements.
Capital buffers determine the damage
Jorge Abad, Saki Bigio, Salomon Garcia-Villegas, Joël Marbet and Galo Nuño find that loan pricing affects transmission through banks' proximity to regulatory capital thresholds.
Under tightening, fixed-rate banks face rising funding costs against unchanged legacy loan income.
Margins compress, capital erodes and vulnerable banks reduce lending more sharply.
Variable-rate banks gain income as legacy loans reprice faster than funding, cushioning the aggregate credit contraction.
Bank failure risk rises in fixed-rate systems but falls in variable-rate systems.
With ample capital and proportional bank-borrower discount factors, contract type does not affect lending transmission; reducing default-loss dispersion nearly restores this benchmark.
Buffer releases narrow the gap
The quarterly model uses euro area data mainly from 2013–2023 and validates responses against the ten largest economies over 2003–2019.
Its minimum capital requirement is 7.0 percent.
A temporary one-percentage-point countercyclical capital-buffer release narrows the lending-response gap and reduces failure risk on impact in both systems.
More gradual tightening with the same cumulative stance reduces peak failures in fixed-rate systems, but tempers the profitability gains and failure-risk reduction in variable-rate systems.
Policy timing has limits
The authors link buffer timing and gradualism to banks' interest-rate exposure, not just aggregate credit conditions.
Their model excludes aggregate-demand feedbacks and endogenous deposit outflows.
The results represent the authors' views, not an ECB policy recommendation.