Traditionally, when monetary policy tightens, it reduces banks’ lending activities,

which is more pronounced for banks with less liquid balance sheets. In such a sce-

nario, liquid assets have been considered stabilizing mechanisms for banks throughout

monetary policy cycles. This paper revisits the role of liquid assets in the transmis-

sion of monetary policy to the banking system by focusing on the interaction between

high-frequency identified monetary shocks and four key liquidity ratios: high-quality,

low-quality, total liquidity, and liquidity coverage ratios. By considering these ratios,

this paper uses local projections to estimate banks’ heterogeneous responses to mon-

etary policy shocks regarding deposit flows, lending activities, liquidity creation, and

profit margins. The findings suggest that the interactions between monetary tighten-

ing shocks and high-quality liquidity ratios stabilize banks’ activities. In contrast, the

interaction between shocks and low-quality liquidity ratios tends to amplify monetary

policy transmission. This paper highlights the importance of differentiating between

the qualities of liquidity and suggests that only certain qualities of liquid assets work

as stabilizers during monetary cycles.

Key words: Banks, Monetary Policy, High-quality liquid assets, Low-quality liquid assets,

liquidity coverage ratios

JEL Codes: E43, E44, E52, E58, G21