Liquidity Shocks, Dollar Funding Costs, and the Bank Lending Channel During the European Sovereign Crisis

56 Pages Posted: 24 Oct 2012 Last revised: 8 Jul 2013

See all articles by Ricardo Correa

Ricardo Correa

Board of Governors of the Federal Reserve System

Horacio Sapriza

Board of Governors of the Federal Reserve System

Andrei Zlate

Federal Reserve Banks - Federal Reserve Bank of Boston

Multiple version iconThere are 3 versions of this paper

Date Written: July 1, 2013

Abstract

This paper documents a new type of cross-border bank lending channel using a novel dataset on the balance sheets of U.S. branches of foreign banks and their syndicated loans. We show that: (1) The U.S. branches of euro-area banks suffered a liquidity shock in the form of reduced access to large time deposits, which prompted them to cut lending to U.S. firms along the extensive margin, negatively affecting corporate investment. (2) The affected branches received additional funding from parent banks, but not enough to offset the lost deposits. (3) The liquidity shock was related to country rather than bank-specific characteristics.

Keywords: Sovereign risk, international banking, money market funds, liquidity management

JEL Classification: F34, G21, G15

Suggested Citation

Correa, Ricardo and Sapriza, Horacio and Zlate, Andrei, Liquidity Shocks, Dollar Funding Costs, and the Bank Lending Channel During the European Sovereign Crisis (July 1, 2013). FRB International Finance Discussion Paper No. 1059. Available at SSRN: https://ssrn.com/abstract=2166017 or http://dx.doi.org/10.2139/ssrn.2166017

Ricardo Correa (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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

Horacio Sapriza

Board of Governors of the Federal Reserve System ( email )

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

Andrei Zlate

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

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