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

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 d...

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Bibliographic Details
Main Author: Karam, Philippe
Other Authors: Merrouche, Ouarda, Souissi, Moez, Turk, Rima
Format: eBook
Language:English
Published: Washington, D.C. International Monetary Fund 2014
Series:IMF Working Papers
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Collection: International Monetary Fund - Collection details see MPG.ReNa
Description
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
Physical Description:38 pages
ISBN:9781498352888