Banks Fearing the Drought? Liquidity Hoarding as a Response to Idiosyncratic Interbank Funding Dry-Ups

41 Pages Posted: 3 Jun 2021

See all articles by Helge Littke

Helge Littke

Deutsche Bundesbank

Matias Ossandon Busch

Halle Institute for Economic Research; Center for Latin American Monetary Studies CEMLA

Date Written: 2021

Abstract

We investigate whether idiosyncratic interbank funding shocks affecting a bank headquarters can trigger a liquidity hoarding reaction by their regional branches. Shock-affected branches of Brazilian banks increase liquid assets and cut lending in the shocks' aftermath compared to non-affected branches within the same municipality, even in absence of a market-wide freeze. These effects increase in branches' reliance on internal funding and vary depending on banks' access to central bank emergency liquidity. Our findings suggest that the geographical fragmentation of branches' funding limits their ability to offset idiosyncratic funding shocks.

JEL Classification: G01, G11, G21

Suggested Citation

Littke, Helge and Ossandon Busch, Matias and Ossandon Busch, Matias, Banks Fearing the Drought? Liquidity Hoarding as a Response to Idiosyncratic Interbank Funding Dry-Ups (2021). Deutsche Bundesbank Discussion Paper No. 16/2021, Available at SSRN: https://ssrn.com/abstract=3857419 or http://dx.doi.org/10.2139/ssrn.3857419

Helge Littke (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Matias Ossandon Busch

Center for Latin American Monetary Studies CEMLA ( email )

Durango 54, Roma Nte
06700
Mexico

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

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