The Transmission of Liquidity Shocks: Evidence from Credit Rating Downgrades

Ouarda Merrouche (), Philippe Karam, Rima Turk Ariss and Moez Souissi

No 10252, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: 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.

Keywords: Credit ratings; Liquidity management; Credit supply; Multinational banks; Internal capital markets (search for similar items in EconPapers)
JEL-codes: E51 F23 F34 F36 G21 (search for similar items in EconPapers)
Date: 2014-11
New Economics Papers: this item is included in nep-ifn and nep-mac
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Citations: View citations in EconPapers (2)

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