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Heterogeneity in the response of banks to a change in monetary policy is an important element in the transmission of this policy through banks. This paper examines the role of bank liquidity, capitalization and market power as internal factors influencing banks' reaction in terms of lending and risk-taking to monetary policy impulses. The ultimate impact of a monetary policy change on bank performance is also considered. The empirical analysis, using large panel datasets for the United States and the euro area, elucidates the sources of differences in the response of banks to changes in policy interest rates by disaggregating down to the individual bank level. This is achieved by the use of a Local GMM technique that also enables us to quantify the degree of heterogeneity in the transmission mechanism. It is argued that the extensive heterogeneity in banks' response identifies overlooked consequences of bank behavior and highlights potential monetary sources of the current financial distress.

The purpose of this article is to develop a bank-oriented rating approach, tailored by incorporating the various heterogeneity dimensions characterizing financial institutions, named "Bank-Tailored Integrated Rating" (BTIR). BTIR is able to catch the financial cycle, including the pandemic crisis, and the ongoing change in banking normative from a microeconomic perspective, and it is inherently coherent with the challenging frontier of forecasting tail risk in financial markets in similar ways as in De Nicolò and Lucchetta (2017), although their approach is macroeconomic) since it considers the downside risk in the theoretical framework. The method employed was an innovative integrated rating (IR) statistical and econometrical panel pre-selection analysis that takes into account the characteristics of risk and the greater heterogeneity of the banks. The result is a challenge rating procedure delivering forward-looking preselection requested by the new International Financial Reporting Standard (IFRS-9). The future direction is extremely promising given the increase in idiosyncratic and systemic risks in financial markets. ; The purpose of this article is to develop a bank-oriented rating approach, tailored by incorporating the various heterogeneity dimensions characterizing financial institutions, named "Bank-Tailored Integrated Rating" (BTIR). BTIR is able to catch the financial cycle, including the pandemic crisis, and the ongoing change in banking normative from a microeconomic perspective, and it is inherently coherent with the challenging frontier of forecasting tail risk in financial markets in similar ways as in De Nicole and Lucchetta (2017), although their approach is macroeconomic) since it considers the downside risk in the theoretical framework. The method employed was an innovative integrated rating (IR) statistical and econometrical panel pre-selection analysis that takes into account the characteristics of risk and the greater heterogeneity of the banks. The result is a challenge rating procedure delivering forward-looking preselection requested by the new International Financial Reporting Standard (IFRS-9). The future direction is extremely promising given the increase in idiosyncratic and systemic risks in financial markets.