Monetary policy changes the stability of German banks differently based on their ownership and business goals. Existing literature shows that monetary policies stabilize markets but can also encourage institutions to take higher risks. Using monthly balance sheet data for five bank types from 1999-2021, we analyze how different monetary policy shocks affect resilience. Resilience is measured through the Z-score, which reflects a bank’s capacity to absorb losses before risking insolvency. The results show that institutions tied to retail deposits and local lending, such as Sparkassen and Credit Unions, face weaker resilience after prolonged accommodative monetary policy, whereas banks with stronger links to capital markets gain resilience in the short run. Monetary policy therefore reshapes the distribution of resilience inside the German banking system as low interest rates compress margins for traditional lenders while larger banks benefit from rising asset prices.
Key findings:
- Monetary policy affects German banks unevenly depending on their business models and ownership structures
- Large and market-oriented banks tend to gain resilience in the short run from accommodative monetary policy
- Sparkassen and Credit Unions experience declining resilience under prolonged low-interest-rate policies
- Unconventional monetary policy after the Global Financial Crisis intensified differences across bank types
- Forward guidance and targeted liquidity measures weakened resilience growth for regional and deposit-oriented banks
- Low interest rates compress margins for traditional lenders while supporting banks linked more strongly to capital markets
- Monetary policy reshapes the distribution of resilience within the German banking system rather than stabilizing all institutions equally
- A uniform monetary policy can generate asymmetric financial stability effects across heterogeneous banking models
Link to Policy Paper: 2026_05_WP02_Israel-Pfeifer-Sepp-Treitz
