Monetary Policy, Bank Fragility, and the Modern Financial Intermediation

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.