Reconfiguring the bank lending channel: Regulation, liquidity, and monetary policy transmission in Germany

Abstract Using a monthly panel covering the full population of German banks from 1999 to 2024, this paper documents a structural break in the bank lending channel following the introduction of the Single Supervisory Mechanism (SSM) in November 2014. The empirical strategy combines fixed‐effects panel regressions, difference‐in‐differences estimations, continuous regulatory exposure models, heterogeneity analyses, instrumental‐variable estimation, dynamic panel specifications, and local projections. Across all specifications, the sensitivity of credit supply to policy‐rate changes declines substantially after 2014. The results indicate that this decrease is driven by stricter prudential regulation, larger liquidity buffers, and a stronger informational channel operating through ECB communication and asset purchase programs. Banks with higher liquidity ratios and greater regulatory exposure exhibit a significantly weaker response to conventional policy‐rate changes. These findings are robust to alternative break dates, time fixed effects, alternative monetary policy measures, and a broad set of macroeconomic controls. The evidence suggests that the bank lending channel has not disappeared, but has been fundamentally reconfigured. Monetary policy effectiveness now depends on the interaction between interest rates, regulatory constraints, liquidity conditions, and expectations rather than on short‐term policy rates alone.