Bank Networks and Monetary Policy Transmission

This paper argues that the existence of bank networks is important for banks' reactions to monetary policy. For the example of Germany, it is found that small banks access the interbank market indirectly through the large head institutions of their respective network organizations. The interbank flows within these networks allow smaller banks to manage their funds in a fashion that helps them in keeping their loan portfolio with nonbanks relatively unaffected after a monetary contraction. This implies that tests for a bank-lending channel in countries with comparable bank networks should not rely on a size criterion only, and explains why several recent contributions have found a prominent role for banks' liquidity positions.