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How do banks respond to increased funding uncertainty?

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  • Robert A. Ritz
  • Ansgar Walther
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    Abstract

    The 2007-9 .financial crisis began with increased uncertainty over funding conditions in money markets. We show that funding uncertainty can explain diverse elements of commercial banks behaviour during the crisis, including:(i) reductions in lending volumes, balance sheets, and profitability;(ii) more intense competition for retail deposits (including deposits turning into a .loss leader.);(iii) stronger lending cuts by more highly extended banks with a smaller deposit base;(iv) weaker pass-through from changes in the central bank.s policy rate to market interest rates; and(v) a binding .zero lower bound.as well as a rationale for unconventional monetary policy.

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    File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe1414.pdf
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    Bibliographic Info

    Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 1414.

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    Date of creation: 05 Jun 2014
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    Handle: RePEc:cam:camdae:1414

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    Web page: http://www.econ.cam.ac.uk/index.htm

    Related research

    Keywords: Bank lending; .financial crises; interbank market; interest rate pass-through; liquidity channel; loan-to-deposit ratio; loss leader; monetary policy; zero lower bound.;

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