For nearly two decades, the European Central Bank has relied on exceptionally low interest rates, massive asset purchases, and generous lending programs to support the economy. These policies were designed to strengthen the financial system after the Global Financial Crisis, the euro crisis, and the pandemic.
But did they make banks more resilient?
A new IREF Working Paper by Karl-Friedrich Israel, Moritz Pfeifer, Tim Sepp, and Benjamin Treitz suggests the answer depends on which banks you look at.
Not all banks respond the same way
Germany’s banking system is unusually diverse.
Large commercial banks such as Deutsche Bank operate internationally and are closely connected to financial markets. By contrast, Sparkassen and Credit Unions are local institutions that rely heavily on customer deposits and relationship lending to households and small businesses.
The authors argue that these different business models should respond differently to monetary policy – and the evidence confirms exactly that.
Measuring bank resilience
Instead of focusing on bank profits or lending, the paper examines bank resilience – a bank’s ability to absorb losses without becoming insolvent.
Using monthly data from 1999 to 2021, the authors construct a resilience measure (the so-called Z-score) for Germany’s five major banking groups and estimate how different ECB policy shocks affected them over time.
This allows them to distinguish between conventional interest-rate changes and unconventional policies such as forward guidance and quantitative easing.
Winners and losers from easy money
The results reveal a clear pattern.
Banks that depend heavily on traditional deposit-taking and local lending – especially Sparkassen and Credit Unions – generally became less resilient during prolonged periods of accommodative monetary policy.
Persistently low interest rates squeezed their interest margins, reducing their ability to build capital over time.
Large commercial banks, however, often experienced the opposite effect. Their stronger links to capital markets meant they benefited from rising asset prices, improved market liquidity, and other side effects of the ECB’s unconventional policies.
In other words, the ECB’s policies did not strengthen all banks equally – they shifted resilience from one part of the banking sector to another.
One monetary policy, different banking models
This finding highlights an often-overlooked challenge of monetary policy.
When central banks keep interest rates very low for extended periods, they do not simply stimulate the economy. They also change the competitive balance between different financial institutions.
Banks built around traditional lending may suffer from shrinking margins, while institutions with greater exposure to financial markets can benefit from higher asset prices and improved liquidity.
Why it matters
Germany’s banking system is often praised for its diversity. Local savings banks and credit cooperatives play a crucial role in financing small businesses and regional economies.
If prolonged monetary easing gradually weakens precisely these institutions, policymakers face an important trade-off. Policies intended to stabilize the financial system as a whole may simultaneously erode the resilience of the banks most closely connected to the real economy.
The authors therefore conclude that monetary policy should not be evaluated solely by its effects on inflation or aggregate financial stability. It should also consider how resilience is distributed across different types of banks, because not every institution responds to easy money in the same way.
Working Paper: Monetary Policy Transmission and Bank Resilience in Germany: Heterogeneous Effects Across Bank Types by Karl-Friedrich Israel, Moritz Pfeifer, Tim Sepp, and Benjamin Treitz.
