Banks’ Responses to Funding Liquidity Shocks: Lending Adjustment, Liquidity Hoarding and Fire Sales

30 Pages Posted: 1 Nov 2011

See all articles by Leo de Haan

Leo de Haan

De Nederlandsche Bank

Jan Willem van den End

De Nederlandsche Bank

Date Written: April 1, 2011

Abstract

The crisis of 2007-2009 has shown that financial market turbulence can lead to huge funding liquidity problems for banks. This paper provides empirical evidence on banks’ responses to wholesale funding shocks, using data of seventeen of the largest Dutch banks over the period January 2004 to April 2010. The dynamic interrelations among instruments of bank liquidity management are modeled in a panel Vector Autoregressive (p-VAR) framework. Orthogonalized impulse responses reveal that banks respond to a negative funding liquidity shock in a number of ways. First, banks reduce lending, especially wholesale lending. Second, banks hoard liquidity in the form of liquid bonds and central bank reserves. Third, banks conduct fire sales of securities, especially equity. We also find that fire sales are triggered by liquidity constraints rather than by solvency constraints.

Keywords: banks, funding, liquidity, banking crisis

JEL Classification: G21, G32

Suggested Citation

de Haan, Leo and van den End, Jan Willem, Banks’ Responses to Funding Liquidity Shocks: Lending Adjustment, Liquidity Hoarding and Fire Sales (April 1, 2011). De Nederlandsche Bank Working Paper No. 293. Available at SSRN: https://ssrn.com/abstract=1951834 or http://dx.doi.org/10.2139/ssrn.1951834

Leo de Haan (Contact Author)

De Nederlandsche Bank ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands
+31 20 5243539 (Phone)
+31 20 5242514 (Fax)

Jan Willem van den End

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

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