Economics at your fingertips  

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

No 34/2018, Discussion Papers from Deutsche Bundesbank

Abstract: We analyze the impact of market liquidity on bank lending in the euro area for different segments over the period 2003 to 2016. Our results on the aggregate level show that market liquidity is positively related to loan volumes and negatively related to credit spreads. Particularly during the financial crisis of 2007-09 and the subsequent European debt crisis, lending was reduced and we observe that banks requested higher credit spreads. Of particular importance is that market liquidity has an asymmetric effect on bank lending: The negative impact of a reduction in liquidity is more significant than the positive impact of an increase in liquidity. This is particularly true for corporate loans where lending conditions would be restricted first in times of impaired market liquidity. The bank-level data confirm the strong impact of market liquidity on bank lending as well. More specifically, we show that non-listed banks, less profitable banks and banks which rely relatively more on net interest income, as well as banks with a high funding liquidity are particularly strongly exposed to market liquidity. Therefore, properly functioning and sufficiently liquid markets are necessary to avoid negative consequences of restrictions in bank lending which would eventually hamper the real economy. This is of the utmost importance against the background of the envisaged capital markets union in the European Union and the potential exit of the United Kingdom from the EU.

Keywords: financial markets; bank lending; liquidity risk (search for similar items in EconPapers)
JEL-codes: G15 G21 G32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-eec
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed

Downloads: (external link) (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this paper

More papers in Discussion Papers from Deutsche Bundesbank Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().

Page updated 2018-11-24
Handle: RePEc:zbw:bubdps:342018