Abstract

We show that losses on banks’ securities portfolios matter for the transmission mecha-
nism of monetary policy even in the absence of financial stability concerns. When banks
experience losses in their pledgeable securities, their ability to tap liquidity through the
interbank market is impaired, and they subsequently reduce illiquid corporate lending,
regardless of whether the securities were recorded at market or historical value. These
effects are less pronounced for banks with abundant collateral and reserves and for
banks that receive liquidity through their group’s internal capital market. Our results
highlight a collateral channel in the bank-based transmission of monetary policy.