The European Central Bank has published Working Paper Series No 3114 on how monetary policy shocks affect euro area banks and non-bank financial institutions, with a focus on how outcomes differ in periods of financial stress. Using high-frequency identified monetary policy shocks and state-dependent local projections, the paper finds that monetary tightening is associated with broad-based contractions in total assets and debt securities holdings, with particularly pronounced effects for banks and investment funds, and that financial stress materially amplifies these contractionary effects across sectors and asset classes. Loan responses are more heterogeneous, including notable declines in money market fund and pension fund loan exposures under high-stress conditions and evidence that some non-bank segments can increase lending after tightening. The analysis draws on aggregated euro area balance sheet data for monetary financial institutions and four non-bank sectors (investment funds, money market funds, insurance companies and pension funds) over January 2009 to October 2022, covering total assets, debt securities and loans and extending to selected within-sector positions and cross-sector interconnections. Under stress regimes defined using the Composite Indicator of Systemic Stress, tightening shocks coincide with sharper contractions in banks’ assets and debt securities and reductions in banks’ lending to other financial intermediaries and to insurers and pension funds, while loans to households rise. Robustness checks using an alternative shock proxy based on two-year overnight index swap surprises broadly confirm the patterns, while indicating that some non-bank responses vary depending on whether the shock is concentrated at the short or long end of the yield curve. The paper is published with the standard disclaimer that it does not represent the views of the ECB.
European Central Bank 2025-09-17
European Central Bank working paper finds financial stress amplifies monetary tightening effects across banks and non-banks
The European Central Bank's Working Paper Series No 3114 examines monetary policy shocks on euro area banks and non-bank financial institutions, highlighting amplified contractionary effects during financial stress. Monetary tightening leads to broad-based asset and debt securities contractions, with banks and investment funds most affected, while loan responses vary, including increased lending by some non-bank segments. The analysis uses euro area balance sheet data from 2009 to 2022 and confirms findings with robustness checks.