Monetary Policy and Banking Operations: Does Ownership Matter?

ABSTRACT This paper examines how monetary‐policy deviations from country‐specific Taylor‐rule benchmarks are associated with bank insolvency risk and profitability, and how ownership and liability‐side funding conditions shape these responses. Using a large cross‐country panel of commercial banks, we show that tighter‐than‐expected monetary policy is related to lower bank insolvency risk. The profitability response is positive on average, but smaller and more sensitive to specification and shock measurement. Monetary tightening also increases banks’ cost of funds, providing evidence of a liability‐side funding‐price channel. Ownership shapes monetary‐policy transmission at both the bank and system levels: the marginal risk response becomes weaker as foreign ownership increases, while a greater system‐wide prevalence of state‐controlled banks reduces the risk‐reducing effect of monetary tightening. Decomposition results indicate that the risk response operates primarily through lower earnings volatility rather than changes in capitalization. These findings remain broadly robust across alternative shock measures, alternative bank outcomes, macroprudential and crisis controls and country‐balanced weighted regressions.