Federal Reserve Bank of Boston
Supervisory Research and Analysis Working Papers
Liquidity Shocks, Dollar Funding Costs, and the Bank Lending Channel during the European Sovereign Crisis
This paper documents a new type of cross-border bank lending channel using a novel dataset on the balance sheets of U.S. branches of foreign banks and their syndicated loans. We show that: (1) The U.S. branches of euro-area banks suffered a liquidity shock in the form of reduced access to large time deposits during the European sovereign debt crisis in 2011. The shock was related to their euro-area affiliation rather than to country- or bank-specific characteristics. (2) The affected branches received additional funding from their parent banks, but not enough to offset the lost deposits. (3) The liquidity shock prompted branches to cut lending to U.S. firms, which occurred mostly along the extensive margin. In turn, the affected U.S. firms suffered reduced access to syndicated loans, which prompted them to cut investment and built up their cash reserves.
Cite this item
Ricardo Correa & Horacio Sapriza & Andrei Zlate, Liquidity Shocks, Dollar Funding Costs, and the Bank Lending Channel during the European Sovereign Crisis, Federal Reserve Bank of Boston, Supervisory Research and Analysis Working Papers RPA 16-4, 30 Sep 2016.
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
Keywords: Sovereign risk; international banking; money market funds; liquidity management.
This item with handle RePEc:fip:fedbqu:rpa16-4
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