Pablo Hernández de Cos: Monetary policy transmission and the banking system

Speech by Mr Pablo Hernández de Cos, Governor of the Bank of Spain, at "The ECB and Its Watchers XXIV" conference, organised by the Institute for Monetary and Financial Stability, Frankfurt am Main, 20 March 2024.

The views expressed in this speech are those of the speaker and not the view of the BIS.

I would like to thank the Institute for Monetary and Financial Stability and the Goethe Universität for inviting me to take part in this event, thus giving me the opportunity to share with you some reflections on the transmission of monetary policy through the banking system during the current hiking cycle.

I will start by summarising some features that could have potentially altered the strength and speed of the monetary policy transmission mechanism in the euro area in comparison with previous tightening cycles. I will then focus on the evidence we have on how monetary policy has been transmitted during the last two years to financial conditions and, ultimately, activity and prices.

Specific features of the current monetary policy tightening cycle

The first factor that could have potentially altered the strength and speed of the monetary policy transmission mechanism in the recent tightening process is related to structural changes in the euro area banking system. Banks are now better capitalised and display higher liquidity ratios than in the past. This is mostly attributable to new regulations introduced after the global financial crisis. Additionally, there has been an increase in the degree of concentration in the banking sector.1 And the economic literature suggests that greater concentration in the banking sector and the existence of healthier banks tend to weaken the monetary policy transmission mechanism.