Wholesale funding runs, global banks' supply of liquidity insurance, and corporate investment

Using supervisory data on the U.S. branches of foreign banks and their syndicated loans, we show that the branches of euro-area banks suffered a liquidity shock in the form of reduced access to wholesale funding from U.S. money market funds during the European sovereign debt crisis. Affected branches cut lending to U.S. firms mostly in the form of revolving credit and along the extensive margin, as increased funding from their parents only partially offset the liquidity shortfall. This shock was amplified by the reaction of exposed U.S. firms, which responded to the loss of credit lines by reducing investment and building up cash reserves. Our findings highlight the impact of funding stress encountered by global banks on firms' investment and precautionary savings.