How Do Global Banks Scramble for Liquidity? Evidence from the Asset-Backed Commercial Paper Freeze of 2007

51 Pages Posted: 19 Mar 2012

See all articles by Viral V. Acharya

Viral V. Acharya

New York University - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Gara Afonso

Federal Reserve Bank of New York

Anna Kovner

Federal Reserve Bank of New York

Multiple version iconThere are 3 versions of this paper

Date Written: March 15, 2012

Abstract

In the August of 2007, banks faced a freeze in funding liquidity from the asset-backed commercial paper (ABCP) market. We investigate how banks scrambled for liquidity in response to this freeze and its implications for the real economy. Commercial banks in the United States raised deposits and took advances from Federal Home Loan Banks (FHLBs). In contrast, foreign banks – with limited access to the deposit market and FHLB advances – lent less in the overnight interbank market and borrowed more from the Federal Reserve’s Term Auction Facility (TAF) auctions. Relative to banks in the United States, relative to before the ABCP freeze and relative to their non-US dollar lending (difference-in-differences), foreign banks with ABCP exposure charged higher interest rates on syndicated loan packages denominated in dollars. The results point to an important funding risk in global banking, manifesting as currency shortages for banks engaged in maturity transformation in foreign countries.

Keywords: Credit crunch, ABCP freeze, liquidity

JEL Classification: G21, G28

Suggested Citation

Acharya, Viral V. and Afonso, Gara and Kovner, Anna, How Do Global Banks Scramble for Liquidity? Evidence from the Asset-Backed Commercial Paper Freeze of 2007 (March 15, 2012). Available at SSRN: https://ssrn.com/abstract=2024369 or http://dx.doi.org/10.2139/ssrn.2024369

Viral V. Acharya (Contact Author)

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Gara Afonso

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

HOME PAGE: http://nyfedeconomists.org/afonso

Anna Kovner

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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