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

Author/Editor:

Philippe D Karam ; Ouarda Merrouche ; Moez Souissi ; Rima Turk

Publication Date:

November 19, 2014

Electronic Access:

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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.

Series:

Working Paper No. 14/207

Subject:

Access to capital markets Bank financing Bank liquidity Banks Credit ratings Liquidity management Loans

English

Publication Date:

November 19, 2014

ISBN/ISSN:

9781498352888/1018-5941

Stock No:

WPIEA2014207

Format:

Paper

Pages:

38

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