Liquidity Shocks, Local Banks, and Economic Activity: Evidence from the 2007-2009 Crisis

66 Pages Posted: 15 Nov 2010

See all articles by Martin Richard Goetz

Martin Richard Goetz

Goethe University Frankfurt - Research Center SAFE

Juan Carlos Gozzi

Board of Governors of the Federal Reserve

Date Written: November 12, 2010

Abstract

This paper studies the relationship between shocks to local banks and economic activity, by exploiting differences in the liability structure of small U.S. commercial banks during the 2007-09 crisis. Banks that relied more heavily on wholesale liabilities reduced lending relatively more during the crisis than banks funding themselves with retail deposits, suggesting that the use of short-term wholesale funding exposed banks to a sudden dry-up in market liquidity. Moreover, metropolitan areas where banks relied more on wholesale liabilities experienced larger reductions in employment and establishments during the crisis, suggesting that adverse shocks to banks hurt the economy. This effect was stronger in areas with more bank-dependent firms, such as small businesses and firms with higher external financing needs.

Keywords: banking and financial crisis, wholesale funding, credit

JEL Classification: E44, E51, G01, G21, G01

Suggested Citation

Goetz, Martin Richard and Gozzi, Juan Carlos, Liquidity Shocks, Local Banks, and Economic Activity: Evidence from the 2007-2009 Crisis (November 12, 2010). Available at SSRN: https://ssrn.com/abstract=1709677 or http://dx.doi.org/10.2139/ssrn.1709677

Martin Richard Goetz (Contact Author)

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Juan Carlos Gozzi

Board of Governors of the Federal Reserve ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.federalreserve.gov/econresdata/juan-carlos-gozzi.htm

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