Foreign Banks, Liquidity Shocks, and Credit Stability

52 Pages Posted: 9 Mar 2020

See all articles by Daniel Belton

Daniel Belton

Michigan State University

Leonardo Gambacorta

Bank for International Settlements (BIS); Centre for Economic Policy Research (CEPR)

Sotirios Kokas

University of Essex - Essex Business School

Date Written: March 3, 2020

Abstract

We empirically assess the responses of banks in the United States to a regulatory change that influenced the distribution of funding in the banking system. Following the 2011 FDIC change in the assessment base, insured banks found wholesale funding more costly, while uninsured branches of foreign banks enjoyed cheaper access to wholesale liquidity. We use quarterly bank balance sheet data and a rich data set of syndicated loans with borrower and lender characteristics to show that uninsured foreign banks, which faced a relatively positive shock, engaged in liquidity hoarding. Hence, they accumulated more reserves but extended fewer total syndicated loans and became more passive in the syndicated loan deals in which they participated. These results contribute to the discussion on the role of foreign banks in credit creation, especially in a country like the United States where foreign banks also have a crucial role in managing USD money market operations at the group level.

Keywords: foreign banks, liquidity shocks, wholesale funding, syndicated loans

JEL Classification: G21, G28, E44

Suggested Citation

Belton, Daniel and Gambacorta, Leonardo and Kokas, Sotirios, Foreign Banks, Liquidity Shocks, and Credit Stability (March 3, 2020). BIS Working Paper No. 845, Available at SSRN: https://ssrn.com/abstract=3549541

Daniel Belton (Contact Author)

Michigan State University

Agriculture Hall
East Lansing, MI 48824-1122
United States

Leonardo Gambacorta

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Sotirios Kokas

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

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