Endogenous Bank Risks and the Lending Channel of Monetary Policy

• Authors: Gabriela Araujo, David Rivero Leiva and Hugo Rodríguez Mendizábal
• BSE Working Paper: 1549 | January 2026
• Keywords: monetary policy, banks, liquidity risk, risk premium, interbank market, credit risk, payments, solvency risk
• JEL codes: E10, E44, E52, G21

This paper develops a general equilibrium banking model where lending and payment flows endogenously link credit, liquidity, and solvency risks. Banks issue deposits at loan origination. As deposits circulate, reserve settlement creates liquidity exposure and repayment shortfalls generate credit and solvency risks. These risks are jointly determined by credit provision and bound balance sheet expansion at an internally determined profitability threshold rather than an external funding or capital limit. We present an application of the theory that provides a new look to the bank lending channel where monetary policy operates through the endogenous generation of bank risks. Our quantitative results align with empirical observations, including declines in deposit growth after monetary policy tightening and its different impact on lending depending on the balance sheet strength of banks as well as the relation of funding costs in interbank markets with liquidity and solvency ratios.