Interbank Liquidity Crunch and the Firm Credit Crunch: Evidence from the 2007-2009 Crisis

44 Pages Posted: 11 May 2013

See all articles by Rajkamal Iyer

Rajkamal Iyer

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Samuel Da-Rocha Lopes

European Central Bank (ECB); Bank of Portugal

José-Luis Peydró

Imperial College London; Centre for Economic Policy Research (CEPR); Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Antoinette Schoar

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: April 2, 2013

Abstract

We study the credit supply effects of the unexpected freeze of the European interbank market, using exhaustive Portuguese loan-level data. We find that banks that rely more on interbank borrowing before the crisis decrease their credit supply more during the crisis. The credit supply reduction is stronger for firms that are smaller, with weaker banking relationships. Small firms cannot compensate the credit crunch with other sources of debt. Furthermore, the impact of illiquidity on the credit crunch is stronger for less solvent banks. Finally, there are no overall positive effects of central bank liquidity, but higher hoarding of liquidity.

Keywords: banking crisis, Interbank markets, Liquidity, Real effects, small businesses

Suggested Citation

Iyer, Rajkamal and Lopes, Samuel and Peydro, Jose-Luis and Schoar, Antoinette, Interbank Liquidity Crunch and the Firm Credit Crunch: Evidence from the 2007-2009 Crisis (April 2, 2013). Available at SSRN: https://ssrn.com/abstract=2263025 or http://dx.doi.org/10.2139/ssrn.2263025

Rajkamal Iyer (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Samuel Lopes

European Central Bank (ECB) ( email )

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Bank of Portugal

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Jose-Luis Peydro

Imperial College London ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

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Antoinette Schoar

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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