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 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.

We present two circumstances under which deposit market competition does not influence the transmission of monetary policy to deposits (i) low interest rate environments and (ii) low reliance on deposit financing. Interestingly, we document how aggregate economic activity is still differentially affected depending on bank competition. This suggests an alternative mechanism linking bank competition and aggregate effects.