How did the crisis in international funding markets affect bank lending? Balance sheet evidence from the United Kingdom

Shekhar Aiyar

No 424, Bank of England working papers from Bank of England

Abstract: Evidence abounds on the propagation of financial stresses originating in the US mortgage market to banking systems worldwide through international funding markets. But the transmission of this external funding shock to the real economy via bank lending is surprisingly underexamined, given the central importance ascribed to this channel of contagion by policymakers. This paper provides evidence of this transmission for the UK-resident banking system, the largest in the world by asset size. It uses a novel data set, created from detailed and confidential balance sheet data reported by individual banks quarterly to the Bank of England. I find that the shock to foreign funding caused a substantial pullback in domestic lending. The results are derived using a range of instruments to correct for endogeneity and omitted variable bias. Foreign subsidiaries and branches reduced lending by a larger amount than domestically owned banks, while the latter calibrated the reduction in domestic lending more closely to the size of the funding shock.

Keywords: Liquidity shock; transmission mechanism; bank lending; instrumental variables. (search for similar items in EconPapers)
JEL-codes: E30 E50 G01 G20 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2011-04-18
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (43)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0424

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