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Interbank Liquidity Crunch and the Firm Credit Crunch: Evidence from the 2007-2009 Crisis

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  • Rajkamal Iyer
  • Samuel Da-Rocha-Lopes
  • José-Luis Peydró
  • Antoinette Schoar

Abstract

We study the credit supply effects of the unexpected freeze of the European interbank market, using exhaustive Portuguese loan-level data. We find that banks that rely more on interbank borrowing before the crisis decrease their credit supply more during the crisis. The credit supply reduction is stronger for firms that are smaller, with weaker banking relationships. Small firms cannot compensate the credit crunch with other sources of debt. Furthermore, the impact of illiquidity on the credit crunch is stronger for less solvent banks. Finally, there are no overall positive effects of central bank liquidity, but higher hoarding of liquidity.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 687.

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Date of creation: Apr 2013
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Handle: RePEc:bge:wpaper:687

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Keywords: credit crunch; banking crisis; interbank markets; access to credit; flight to quality; lender of last resort; liquidity hoarding;

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  1. Daniel Paravisini, 2008. "Local Bank Financial Constraints and Firm Access to External Finance," Journal of Finance, American Finance Association, American Finance Association, vol. 63(5), pages 2161-2193, October.
  2. Jean-Charles Rochet & Xavier Vives, 2002. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," FMG Discussion Papers, Financial Markets Group dp408, Financial Markets Group.
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Cited by:
  1. Peia, Oana & Vranceanu , Radu, 2014. "Optimal Return in a Model of Bank Small-business Financing," ESSEC Working Papers, ESSEC Research Center, ESSEC Business School WP1403, ESSEC Research Center, ESSEC Business School.
  2. Rebecca Riley & Chiara Rosazza Bondibene & Garry Young, 2013. "Productivity Dynamics in the Great Stagnation: Evidence from British businesses," Discussion Papers, Centre for Macroeconomics (CFM) 1407, Centre for Macroeconomics (CFM), revised Apr 2014.

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