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

62 Pages Posted: 7 Sep 2017

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: 2016-09-30

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 during the European sovereign debt crisis in 2011. The shock was related to their euro-area affiliation rather than to country- or bank-specific characteristics. (2) The affected branches received additional funding from their parent banks, but not enough to offset the lost deposits. (3) The liquidity shock prompted branches to cut lending to U.S. firms, which occurred mostly along the extensive margin. In turn, the affected U.S. firms suffered reduced access to syndicated loans, which prompted them to cut investment and built up their cash reserves.

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

JEL Classification: F34, G15, G21

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 (2016-09-30). FRB Boston Risk and Policy Analysis Unit Paper No. RPA 16-4. Available at SSRN: https://ssrn.com/abstract=3033353

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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