We present evidence that loan spreads earned by banks over marketable interest rates are inversely related to the level of short-term interest rates. Using loan-level data on business lending in France, we rule out demand-side explanations and demonstrate that this negative correlation aligns with a supply-side narrative: banks with larger loan spreads when interest rates decline experience lower growth in credit volumes. We provide empirical support for theories linking frictions in the deposit-taking business to the lending behavior of financially constrained banks. Our evidence is consistent with lower interest rates compressing deposit spreads for banks that remunerate deposits below market rates, which reduces their net interest margins, weakens their balance sheets, and prompts constrained banks to reduce credit supply, thereby contributing to the observed rise in loan spreads. Additionally, we find evidence for a complementary channel: lending market power. In particular, lenders with higher market shares and borrowers facing a more severe “hold-up problem” are associated with a lower interest rate pass-through. Finally, we document real effects on corporate financing and investment for firms borrowing from banks with reduced pass-through.