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When the rivers run dry : liquidity and the use of wholesale funds in the transmission of the U.S. subprime crisis

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  • Raddatz, Claudio

Abstract

This paper provides systematic evidence of the role of banks'reliance on wholesale funding in the international transmission of the ongoing financial crisis. It conducts an event study to estimate the impact of the liquidity crunch of September 15, 2008, on the stock price returns of 662 individual banks across 44 countries, and tests whether differences in the abnormal returns observed around those events relate to these banks'ex-ante reliance on wholesale funding. Globally and within countries, banks that relied more heavily in non-deposit sources of funds experienced a significantly larger decline in stock returns even after controlling for other mechanisms. Within a country, the abnormal returns of banks with high wholesale dependence fell about 2 percent more than those of banks with low dependence during the three days following Lehman Brothers'bankruptcy. This large differential return suggests that liquidity played an important role in the transmission of the crisis.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5203.

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Date of creation: 01 Feb 2010
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Handle: RePEc:wbk:wbrwps:5203

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Keywords: Banks&Banking Reform; Debt Markets; Access to Finance; Financial Intermediation; Emerging Markets;

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Cited by:
  1. Didier, Tatiana & Hevia, Constantino & Schmukler, Sergio L., 2012. "How resilient and countercyclical were emerging economies during the global financial crisis?," Journal of International Money and Finance, Elsevier, Elsevier, vol. 31(8), pages 2052-2077.
  2. Opazo, Luis & Raddatz, Claudio & Schmukler, Sergio L., 2009. "The long and the short of emerging market debt," Policy Research Working Paper Series 5056, The World Bank.
  3. Claudio Raddatz ; & Sergio L. Schmukler, 2012. "On the International Transmission of Shocks: Micro – Evidence From Mutual Fund Portfolios," Working Papers Central Bank of Chile, Central Bank of Chile 668, Central Bank of Chile.
  4. Dumontaux, Nicolas & Pop, Adrian, 2013. "Understanding the market reaction to shockwaves: Evidence from the failure of Lehman Brothers," Journal of Financial Stability, Elsevier, Elsevier, vol. 9(3), pages 269-286.
  5. International Monetary Fund, 2011. "Impact of the Global Crisison Banking Sector Soundness in Asian Low-Income Countries," IMF Working Papers 11/115, International Monetary Fund.
  6. Ceballos, Francisco & Didier, Tatiana & Hevia, Constantino & Schmukler, Sergio, 2012. "Respuestas de política a la crisis financiera global: ¿Qué hicieron diferente las economías emergentes?," Revista Estudios Económicos, Banco Central de Reserva del Perú, Banco Central de Reserva del Perú, issue 24, pages 27-43.
  7. Didier, Tatiana & Hevia, Constantino & Schmukler, Sergio L., 2011. "How resilient and countercyclical were emerging economies to the global financial crisis ?," Policy Research Working Paper Series 5637, The World Bank.

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