The Transmission of Liquidity Shocks: The Role of Internal Capital Markets and Bank Funding Strategies

By Philippe D Karam, Ouarda Merrouche, Moez Souissi, Rima A Turk

November 19, 2014

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Philippe D Karam, Ouarda Merrouche, Moez Souissi, and Rima A Turk. The Transmission of Liquidity Shocks: The Role of Internal Capital Markets and Bank Funding Strategies, (USA: International Monetary Fund, 2014) accessed November 8, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We analyze the transmission of bank-specific liquidity shocks triggered by a credit rating downgrade through the lending channel. Using bank-level data for US Bank Holding Companies, we find that a credit rating downgrade is associated with an immediate and persistent decline in access to non-core deposits and wholesale funding, especially during the global financial crisis. This translates into a reduction in lending to households and non-financial corporates at home and abroad. The effect on domestic lending, however, is mitigated when banks (i) hold a larger buffer of liquid assets, (ii) diversify away from rating-sensitive sources of funding, and (iii) activate internal liquidity support measures. Foreign lending is significantly reduced during a crisis at home only for subsidiaries with weak funding self-sufficiency.

Subject: Asset and liability management, Bank credit, Banking, Credit ratings, Deposit insurance, Financial crises, Financial institutions, Liquidity, Loans, Money

Keywords: Bank activity, Bank affiliate, Bank credit, Bank downgrade, Bank funding, Bank Funding strategy, Bank lending, Credit rating, Credit ratings, Credit supply, Deposit insurance, Downgraded bank, Financial crisis, Global, Internal capital markets, Liquidity, Liquidity management, Liquidity shock, Loans, Money market, Multinational banks, Parent bank, Parent company, Top-rated bank, WP

Publication Details

Pages:

38
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2014/207
Stock No:

WPIEA2014207
ISBN:

9781498352888
ISSN:

1018-5941

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