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

41 Pages Posted: 30 Jun 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: November 9, 2012

Abstract

This paper documents a new type of cross-border bank lending channel. The deepening of the European sovereign debt crisis in 2011 restrained the financial intermediation of European banks in the United States. In this period, some of the U.S. branches of European banks faced a dollar liquidity shock — due to their perceived risk reflecting the sovereign risk of their countries of origin — which in turn affected the branches’ lending to U.S. entities. We use a novel dataset to analyze the operations of branches of foreign banks in the United States. Our results show that: (1) The U.S. branches of European banks experienced a run on their deposits, mainly from U.S. money market funds. (2) The branches with curtailed access to large time deposits relied more on funding from their own parent institutions, thus shifting from being net suppliers to being net receivers of dollar funding from their related offices. (3) Since the additional funding received from parent institutions was not enough to offset the decreased access to U.S. funding, such branches reduced their lending to U.S. entities.

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 (November 9, 2012). FRB International Finance Discussion Paper No. 1059. Available at SSRN: https://ssrn.com/abstract=2178022 or http://dx.doi.org/10.2139/ssrn.2178022

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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