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How did the crisis in international funding markets affect bank lending? Balance sheet evidence from the United Kingdom

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  • Aiyar, Shekhar

    () (Bank of England)

Abstract

Evidence abounds on the propagation of financial stresses originating in the US mortgage market to banking systems worldwide through international funding markets. But the transmission of this external funding shock to the real economy via bank lending is surprisingly underexamined, given the central importance ascribed to this channel of contagion by policymakers. This paper provides evidence of this transmission for the UK-resident banking system, the largest in the world by asset size. It uses a novel data set, created from detailed and confidential balance sheet data reported by individual banks quarterly to the Bank of England. I find that the shock to foreign funding caused a substantial pullback in domestic lending. The results are derived using a range of instruments to correct for endogeneity and omitted variable bias. Foreign subsidiaries and branches reduced lending by a larger amount than domestically owned banks, while the latter calibrated the reduction in domestic lending more closely to the size of the funding shock.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 424.

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Length: 35 pages
Date of creation: 18 Apr 2011
Date of revision:
Handle: RePEc:boe:boeewp:0424

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Keywords: Liquidity shock; transmission mechanism; bank lending; instrumental variables.;

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  1. Acharya, Viral V. & Gale, Douglas M & Yorulmazer, Tanju, 2009. "Rollover Risk and Market Freezes," CEPR Discussion Papers 7122, C.E.P.R. Discussion Papers.
  2. Cerutti, Eugenio & Dell'Ariccia, Giovanni & Martinez Peria, Maria Soledad, 2005. "How banks go abroad : branches or subsidiaries ?," Policy Research Working Paper Series 3753, The World Bank.
  3. Campello, Murillo & Graham, John R. & Harvey, Campbell R., 2010. "The real effects of financial constraints: Evidence from a financial crisis," Journal of Financial Economics, Elsevier, vol. 97(3), pages 470-487, September.
  4. De Haas, Ralph & van Lelyveld, Iman, 2009. "Internal Capital Markets and Lending by Multinational Bank Subsidiaries," MPRA Paper 13164, University Library of Munich, Germany.
  5. Niall Coffey & Warren B. Hrung & Hoai-Luu Nguyen & Asani Sarkar, 2009. "The global financial crisis and offshore dollar markets," Current Issues in Economics and Finance, Federal Reserve Bank of New York, issue Oct.
  6. de Haas, Ralph & van Lelyveld, Iman, 2006. "Foreign banks and credit stability in Central and Eastern Europe. A panel data analysis," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 1927-1952, July.
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Cited by:
  1. Ralph de Haas & Neeltje van Horen, 2011. "Running for the Exit: International Banks and Crisis Transmission," DNB Working Papers 279, Netherlands Central Bank, Research Department.
  2. William A. Allen & Richhild Moessner, 2011. "The international propagation of the financial crisis of 2008 and a comparison with 1931," BIS Working Papers 348, Bank for International Settlements.
  3. David Cobham & Yue Kang, 2012. "Financial Crisis And Quantitative Easing: Can Broad Money Tell Us Anything?," Manchester School, University of Manchester, vol. 80, pages 54-76, 09.
  4. Rose, Andrew & Wieladek, Tomasz, 2011. "Financial protectionism: the first tests," Discussion Papers 32, Monetary Policy Committee Unit, Bank of England.
  5. Shekhar Aiyar, 2012. "From Financial Crisis to Great Recession: The Role of Globalized Banks," American Economic Review, American Economic Association, vol. 102(3), pages 225-30, May.
  6. Ralph De Haas & Iman Van Lelyveld, 2011. "Multinational banks and the global financial crisis: weathering the perfect storm?," Working Papers 135, European Bank for Reconstruction and Development, Office of the Chief Economist.
  7. Shekhar Aiyar & Charles W. Calomiris & Tomasz Wieladek, 2012. "Does Macro-Pru Leak? Evidence from a UK Policy Experiment," NBER Working Papers 17822, National Bureau of Economic Research, Inc.
  8. Andrea Filippo Presbitero & Gregory F. Udell & Alberto Zazzaro, 2012. "The Home Bias and the Credit Crunch: A Regional Perspective," Mo.Fi.R. Working Papers 60, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.

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