This article reviews recent research on monetary policy transmission through banks and the broader financial intermediation sector, and its implications for financial stability. Traditional banks remain fragile due to high leverage and maturity transformation, making them vulnerable to interest rate, credit, and liquidity shocks. Meanwhile, the rise of nonbank intermediation—now involved in most lending—has reshaped how credit is originated, funded, and distributed, complicating policy transmission and regulation. We examine evidence on six key adjustment margins of monetary policy transmission through banks and the financial intermediation sector: (
a
) balance sheet valuation, (
b
) loan retention, (
c
) securities holdings, (
d
) shadow bank lending substitution, (
e
) deposit substitution, and (
f
) bank-to-nonbank lending. These channels often reallocate credit in response to monetary and capital shocks rather than just altering its aggregate level, highlighting the need for a system-wide perspective that reflects the adaptive, interconnected nature of modern financial intermediation.
Gregor Matvos, T. Piskorski, Amit Seru· Annual Review of Economics· 0 citations
This article surveys recent theoretical and empirical advancements on the impact of interest rates on bank valuations and stability—two crucial concerns for financial researchers, policy makers, and regulators. We begin by highlighting the distinctive feature of the regional banking crisis of 2023—the prevalence of liquid assets on bank balance sheets—in contrast to earlier crises such as the savings and loan crisis of the 1980s and 1990s, where illiquid assets contributed to banking failure. In Section 2, we present a theoretical framework that integrates both asset illiquidity and the risk of self-fulfilling solvency runs on the deposit franchise. We show the conditions under which the deposit franchise fails to hedge asset declines due to rising interest rates and demonstrate how and why this amplifies bank fragility. Sections 3–5 explore empirical methods for assessing these effects. We review approaches to measuring the interest rate sensitivity of bank asset values, highlighting their limitations. We also examine recent advances in quantifying bank fragility, particularly the challenges of valuing the deposit franchise under both stable conditions and crisis scenarios. Additionally, we discuss new measures of bank fragility that capture the potential endogenous collapse of franchise value during crises. Applying these measures leads us to conclude that US banks face significant unhedged interest rate exposure in their asset portfolios. When combined with their high leverage, this exposure substantially increases the risk of solvency runs. Liquidity interventions, while useful in the short term, are insufficient for addressing the systemic risks posed by this vulnerability.
E. Jiang, Gregor Matvos, T. Piskorski et al.· Annual Review of Financial E...· 0 citations