We show that losses on banks’ securities portfolios matter for the transmission mechanism of monetary policy even in the absence of financial stability concerns. When banks experience losses in their pledgeable securities, their ability to tap liquidity through the interbank market is impaired, and they subsequently reduce illiquid corporate lending,

regardless of whether the securities were recorded at market or historical value. These effects are less pronounced for banks with abundant collateral and reserves and for banks that receive liquidity through their group’s internal capital market. Our results highlight a collateral channel in the bank-based transmission of monetary policy.

We document a novel channel through which bank failures affect the economy by increasing the funding costs of surviving banks, thereby further contracting bank credit provision. Using a sample of U.S. bank failures, we find that competitor banks significantly raise deposit rates following a nearby bank failure, even when controlling for local economic conditions and bank fundamentals. The effect is persistent, lasting up to three years, and is stronger following highly publicized failures. At the same time, we observe weaker deposit and loan growth at surviving banks after failures, despite non-bank lending growing in those areas. Consistent with an increase in depositor price sensitivity, we observe price effects for uninsured and insured deposits. Our findings highlight how banking crises propagate indirectly by making funding more expensive, even if remaining banks are safe, thereby constraining credit supply and amplifying economic downturns.

Does additional liability for bank executives improve risk management? We address this question using uniquely detailed data on the underwriting activities of one of the largest Dutch banks in the early 20th century. Its executives faced additional liability as they partially guaranteed their banks’ security underwriting. If the issuance was successful, they received the underwriting fee; if it failed, they had to personally purchase securities at a loss. Exploiting exogenous discontinuities in the size of these guarantees, we find that issuance quality was higher for bigger guarantees. Investor subscription rates were higher and issuing firms had stronger balance sheets. Results indicate that additional liability directly tied to executives' decisions can help reduce bank risk-taking.