The Transmission of Liquidity Shocks: The Role of Internal Capital Markets and Bank Funding Strategies
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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.
Series:
Working Paper No. 2014/207
Subject:
Asset and liability management Bank credit Banking Credit ratings Deposit insurance Financial crises Financial institutions Liquidity Loans Money
English
Publication Date:
November 19, 2014
ISBN/ISSN:
9781498352888/1018-5941
Stock No:
WPIEA2014207
Pages:
38
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