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

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

No 2014/207, IMF Working Papers from International Monetary Fund

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: WP; credit rating; parent company; bank lending; financial crisis; money market; Credit ratings; Liquidity management; Credit supply; Multinational banks; Internal capital markets; downgraded bank; liquidity shock; parent bank; bank affiliate; bank Funding strategy; bank funding; top-rated bank; bank activity; bank downgrade; Liquidity; Bank credit; Loans; Deposit insurance; Global (search for similar items in EconPapers)
Pages: 38
Date: 2014-11-19
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Citations: View citations in EconPapers (7)

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