The Transmission of Liquidity Shocks: The Role of Internal Capital Markets and Bank Funding Strategies
39 Pages Posted: 31 Dec 2014
Date Written: November 2014
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: Banks, Bank liquidity, Credit ratings, Access to capital markets, Loans, Bank financing, Liquidity management, Credit supply, Multinational banks, Internal capital markets, lending, deposits, subsidiaries, insurance, foreign banks
JEL Classification: E51, F23, F34, F36, G21
Suggested Citation: Suggested Citation