We show that the effectiveness of unconventional monetary policy is limited by how banks manage liquidity risk, including credit supply, in response to fragile non-bank funding. For identification, we use granular U.S. administrative deposit account, loan-level, and balance sheet data, in conjunction with variations in quantitative easing (QE) and tightening (QT) and an ex-ante bank-level exposure measure to non-banks. QE mechanically increases bank fragility by triggering large inflows of uninsured deposits from non-bank financial institutions. However, we show that banks more exposed to this fragility actively manage this liquidity risk. On the liability side, more exposed banks offer better rates to insured deposits while cutting uninsured rates; by doing so, they shift away from uninsured to insured deposits. On the asset side, exposed banks move away from reserves into higher-yield liquid assets without changing their liquidity regulatory requirements. Moreover, exposed banks also reduce the supply of contingent credit lines to corporate clients. Firms reliant on more exposed banks experience an aggregate reduction in the amount of liquidity insurance they enjoy against future shocks. Our analysis reveals that the fragility of deposit funding can disrupt the complementarity between deposit-taking and the provision of credit lines. Finally, QT does not reverse the QE-associated higher fragile funding from non-bank financial institutions, while overall reserves are lower; consistently, more exposed banks further cut credit lines to non-financial firms.

We examine how monetary policy transmits through non-bank lenders (NBLs) using

comprehensive loan-level data covering the universe of all term loans in an economy. A one percentage-point (pp) increase in the policy rate leads NBLs to raise lending rates by 0.17 pp more than banks and to contract credit sharply on the extensive margin. We show that this amplification is driven by a liability wedge: banks’ price-insensitive deposit franchise stabilizes their funding costs, whereas NBLs rely on short-term wholesale debt that reprices immediately. This funding fragility exposes NBLs to rapid balance-sheet deterioration, resulting in higher pass-through and a stronger contraction in lending. This credit contraction spills over to the real economy, causing firms with high non-bank exposure to reduce as sets, liabilities, employment, and profitability significantly more than bank-dependent firms. Consequently, we show that NBLs can act as stronger amplifiers of monetary policy than banks.

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.