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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. Barry Eichengreen & Ashoka Mody & Milan Nedeljkovic & Lucio Sarno, 2012. "How the Subprime Crisis Went Global: Evidence from Bank Credit Default Swap Spreads," Working papers 21, National Bank of Serbia.
  2. Cerutti, Eugenio & Dell'Ariccia, Giovanni & Martinez Peria, Maria Soledad, 2007. "How banks go abroad: Branches or subsidiaries?," Journal of Banking & Finance, Elsevier, vol. 31(6), pages 1669-1692, June.
  3. de Haas, Ralph & van Lelyveld, Iman, 2010. "Internal capital markets and lending by multinational bank subsidiaries," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 19(1), pages 1-25, January.
  4. Murillo Campello & John Graham & Campbell R. Harvey, 2009. "The Real Effects of Financial Constraints: Evidence from a Financial Crisis," NBER Working Papers 15552, National Bureau of Economic Research, Inc.
  5. Viral V. Acharya & Douglas Gale & Tanju Yorulmazer, 2010. "Rollover Risk and Market Freezes," NBER Working Papers 15674, National Bureau of Economic Research, Inc.
  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.
  7. 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, Federal Reserve Bank of New York, vol. 15(Oct).
  8. Daniel M. Covitz & Nellie Liang & Gustavo A. Suarez, 2009. "The evolution of a financial crisis: panic in the asset-backed commercial paper market," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2009-36, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Ralph De Haas & Neeltje Van Horen, 2011. "Running for the exit: international banks and crisis transmission," Working Papers 124, European Bank for Reconstruction and Development, Office of the Chief Economist.
  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. Andrew K. Rose & Tomasz Wieladek, 2011. "Financial Protectionism: the First Tests," NBER Working Papers 17073, National Bureau of Economic Research, Inc.
  4. Scopelliti, Alessandro Diego, 2013. "Off-balance sheet credit exposure and asset securitisation: what impact on bank credit supply?," MPRA Paper 43890, University Library of Munich, Germany.
  5. David Cobham & Yue Kang, 2012. "Financial crisis and quantitative easing: can broad money tell us anything?," Heriot-Watt University Economics Discussion Papers, Department of Economics, School of Management and Languages, Heriot Watt University 1206, Department of Economics, School of Management and Languages, Heriot Watt University.
  6. Nicolas Arregui & Jaromir Benes & Ivo Krznar & Srobona Mitra & Andre Santos, 2013. "Evaluating the Net Benefits of Macroprudential Policy," IMF Working Papers 13/167, International Monetary Fund.
  7. Shekhar Aiyar & Sonali Jain-Chandra, 2012. "The Domestic Credit Supply Response to International Bank Deleveraging," IMF Working Papers 12/258, International Monetary Fund.
  8. Shekhar Aiyar & Romain A Duval & Damien Puy & Yiqun Wu & Longmei Zhang, 2013. "Growth Slowdowns and the Middle-Income Trap," IMF Working Papers 13/71, International Monetary Fund.
  9. Ralph Haas & Iman Lelyveld, 2014. "Multinational Banks and the Global Financial Crisis: Weathering the Perfect Storm?," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 46(s1), pages 333-364, 02.
  10. Andrea Filippo Presbitero & Gregory F. Udell & Alberto Zazzaro, 2012. "The Home Bias and the Credit Crunch: A Regional Perspective," Mo.Fi.R. Working Papers, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences 60, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  11. Düwel, Cornelia, 2013. "Repo funding and internal capital markets in the financial crisis," Discussion Papers 16/2013, Deutsche Bundesbank, Research Centre.
  12. Aiyar, Shekhar & Calomiris , Charles W & Wieladek, Tomasz, 2012. "Does macropru leak? Evidence from a UK policy experiment," Bank of England working papers 445, Bank of England.
  13. Joyce, Michael & Spaltro, Marco, 2014. "Quantitative easing and bank lending: a panel data approach," Bank of England working papers 504, Bank of England.
  14. 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.

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