Monetary Transmission through Bank Securities Portfolios

2023-18 | May 1, 2024

We study the transmission of monetary policy through bank securities portfolios using granular supervisory data on U.S. bank securities, hedging positions, and corporate credit. Banks that experienced larger losses on their securities during the 2022-2023 monetary tightening cycle extended less credit to firms. This spillover effect was stronger for available-for-sale securities, unhedged securities, and banks that must include unrealized gains and losses in their regulatory capital. A structural model, disciplined by our cross-sectional regression estimates, shows that interest rate transmission is stronger the more banks are required to adjust their regulatory capital for unrealized value changes of securities.

About the Authors
Pascal Paul is a senior economist in the Economic Research Department of the Federal Reserve Bank of San Francisco. Learn more about Pascal Paul
Daniel L. Greenwald, New York University Stern School of Business
John Krainer, Board of Governors of the Federal Reserve System