Abstract
<jats:p>An important consequence of unconventional monetary policy is a substantial increase in the amount of reserves held in banks’ balance sheets. In this article, we analyse whether a higher level of reserves affects credit supply to the real economy. Using data for euro area banks after the ECB initiated asset purchases in 2014-2015, we show that reserve creation related negatively to their security holdings and positively to bank loans, in line with portfolio rebalancing theories. The results account for endogeneity in reserve holding and are less pronounced for banks with higher risk of deposit outflows. However, reserve-induced lending is not limited to monetary easing. During the 2022-2023 ECB tightening cycle, reserve-rich banks mitigated credit declines to firms, impairing transmission. Results were stronger for banks facing frictions related to market fragmentation and financial constraints. Overall, our work implies that central bank reserves can have far-reaching consequences for monetary policy transmission through the bank lending channel.</jats:p>