We explore how banks’ local lending market specialization shapes their loan supply in response to monetary policy changes. We show how this effect has aggregate regional effects on aggregate lending and house prices and bank implications on overall geographical specialization. We provide theoretical and empirical evidence in line with heterogeneous lending costs across markets, being a relevant driver of the results.

We analyze how the level of monetary policy rates affects the relevance of deposit market competition for the transmission of monetary policy. We find that following a monetary policy tightening when interest rates are sufficiently low (high), banks’ branches located in concentrated deposit markets experience an increase (decrease) in deposit quantities relative to branches of the same bank located in competitive markets. We also find how this differential effect translates partially into the lending markets, but do not find a differential effect in the labour market (wages and employment). These results suggest that monetary policy transmission channels may work differently when interest rates are low consistent with the presence of zero lower bound constraints in the deposit market.

We highlight the role of firms’ financial reporting quality in the transmission of bank credit supply shocks to the economy. We find that after an adverse bank credit supply shock, firms with lower financial reporting quality experience a sharper contraction in bank credit compared to firms with higher financial reporting quality. Further, such firms are unable to fully substitute the additional drop in bank credit with alternative financing sources, resulting in a higher decrease in their investment and assets growth.