The European Central Bank published Working Paper No. 3129 examining whether unrealized losses on banks’ debt securities held at amortized cost affect the transmission of monetary policy to lending in the euro area. The authors find that unrealized losses materially amplify the contraction in credit supply during the 2022–2023 tightening cycle, with a one percentage point increase in the share of unrealized losses linked to an additional roughly one percentage point decline in lending growth. The paper includes a disclaimer that it should not be reported as representing the views of the ECB. Using granular supervisory data on security holdings merged with AnaCredit loan-level data, the analysis covers 82 euro area banks lending to 411,965 firms across 18 countries and shows stronger effects for weakly capitalised and less liquid banks and those more reliant on uninsured deposits. Banks with larger unrealized losses are also associated with actions to mitigate stress, including raising capital buffers and increasing pass-through of policy rate hikes to deposit rates via higher deposit betas, while interest rate hedging strategies can fully offset the negative lending impact. The contraction in lending is reported to be particularly severe for smaller borrowing firms.
European Central Bank 2025-10-02
European Central Bank working paper finds unrealized losses on amortized-cost securities amplify rate-hike effects on euro area bank lending
The European Central Bank's Working Paper No. 3129 examines how unrealized losses on banks' debt securities affect monetary policy transmission in the euro area. The study finds these losses significantly amplify credit supply contraction during the 2022–2023 tightening cycle, especially impacting weakly capitalized and less liquid banks. Banks with larger unrealized losses tend to raise capital buffers and adjust deposit rates, with smaller firms facing more severe lending contractions.