Cover IMF Working Papers
The Transmission of Liquidity Shocks: The Role of Internal Capital Markets and Bank Funding Strategies
Author: Mr. Philippe D Karam, Ouarda Merrouche1, Moez Souissi, and Ms. Rima A Turkhttps://orcid.org/0000-0001-5321-6524
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund
Series:
IMF Working Papers
Volume/Issue:
Volume 2014: Issue 207
Language:
English
Publication Date:
19 Nov 2014
DOI:
https://doi.org/10.5089/9781498352888.001
ISBN:
9781498352888
ISSN:
1018-5941
Pages:
38
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
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund