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Banks' responses to funding liquidity shocks: lending adjustment, liquidity hoarding and fire sales

Leo de Haan () and Jan Willem End ()

DNB Working Papers from Netherlands Central Bank, Research Department

Abstract: The crisis of 2007-2009 has shown that financial market turbulence can lead to huge funding liquidity problems for banks. This paper provides empirical evidence on banks' responses to wholesale funding shocks, using data of seventeen of the largest Dutch banks over the period January 2004 to April 2010. The dynamic interrelations among instruments of bank liquidity management are modelled in a panel Vector Autoregressive (p-VAR) framework. Orthogonalized impulse responses reveal that banks respond to a negative funding liquidity shock in a number of ways. First, banks reduce lending, especially wholesale lending. Second, banks hoard liquidity in the form of liquid bonds and central bank reserves. Third, banks conduct fire sales of securities, especially equity. We also find that fire sales are triggered by liquidity constraints rather than by solvency constraints.

Keywords: Banks; Funding; Liquidity; Banking crisis (search for similar items in EconPapers)
JEL-codes: G21 G32 (search for similar items in EconPapers)
Date: 2011-04
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
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Citations: View citations in EconPapers (5) Track citations by RSS feed

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Related works:
Journal Article: Banks’ responses to funding liquidity shocks: Lending adjustment, liquidity hoarding and fire sales (2013) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:dnb:dnbwpp:293

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