The Transmission of Liquidity Shocks: Evidence from Credit Rating Downgrades

40 Pages Posted: 17 Nov 2014

See all articles by Philippe D. Karam

Philippe D. Karam

International Monetary Fund (IMF)

Ouarda Merrouche

European University Institute

Moez Souissi

Government of Canada - Bank of Canada

Rima Turk-Ariss

International Monetary Fund; Economic Research Forum

Date Written: November 2014

Abstract

We analyze the transmission of bank-specific liquidity shocks triggered by a credit rating downgrade through the lending channel. Using bank-level data for US Bank Holding Companies, we find that a credit rating downgrade is associated with an immediate and persistent decline in access to non-core deposits and wholesale funding, especially during the global financial crisis. This translates into a reduction in lending to households and non-financial corporates at home and abroad. The effect on domestic lending, however, is mitigated when banks (i) hold a larger buffer of liquid assets, (ii) diversify away from rating-sensitive sources of funding, and (iii) activate internal liquidity support measures. Foreign lending is significantly reduced during a crisis at home only for subsidiaries with weak funding self-sufficiency.

Keywords: credit ratings, credit supply, internal capital markets, liquidity management, multinational banks

JEL Classification: E51, F23, F34, F36, G21

Suggested Citation

Karam, Philippe and Merrouche, Ouarda and Souissi, Moez and Turk-Ariss, Rima, The Transmission of Liquidity Shocks: Evidence from Credit Rating Downgrades (November 2014). CEPR Discussion Paper No. DP10252. Available at SSRN: https://ssrn.com/abstract=2526365

Philippe Karam (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Ouarda Merrouche

European University Institute ( email )

Villa Schifanoia
133 via Bocaccio
Firenze (Florence), Tuscany 50014
Italy

Moez Souissi

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Rima Turk-Ariss

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Economic Research Forum ( email )

21 Al-Sad Al-Aaly St.
(P.O. Box: 12311)
Dokki, Cairo
Egypt

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