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What are the real effects of financial market liquidity? Evidence on bank lending from the euro area

Andreas R. Dombret, Daniel Foos (), Kamil Pliszka and Alexander Schulz

Journal of International Financial Markets, Institutions and Money, 2019, vol. 62, issue C, 152-183

Abstract: We analyze the impact of market liquidity on bank lending in the euro area over the period 2003–16 and find that market liquidity is positively related to aggregate loan volumes and negatively related to average credit spreads. This relation is stronger during crisis times and asymmetric so as the impact of a reduction in liquidity is more significant. Results are confirmed on the individual bank level and strongest for non-listed and less profitable banks. This implies that properly functioning and sufficiently liquid financial markets are necessary to avoid negative consequences of restrictions in bank lending for the real economy.

Keywords: Financial markets; Bank lending; Liquidity risk (search for similar items in EconPapers)
JEL-codes: G15 G21 G32 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:62:y:2019:i:c:p:152-183

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