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Crises and rescues: liquidity transmission through international banks

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  • Claudia Buch
  • Catherine Koch
  • Michael Koetter

Abstract

This paper studies how global banks transmit liquidity shocks via their internal capital markets. The unexpected access of German banks' affiliates located in the United States (US) to the Federal Reserve's Term Auction Facility (TAF) serves as our liquidity shock. Using microdata on all affiliates abroad, we test whether affiliates located outside the US adjusted their balance sheets during periods, when the US-located affiliate of the same parent received TAF loans. Our analysis has three main findings. First, during periods of active TAF borrowing, foreign affiliates of parent banks with high US dollar funding needs reduced their foreign assets by less. We identify those parents based on their pre-crisis exposure to the US asset-backed commercial paper (ABCP) market. Second, foreign affiliates in financial centers also shrank their assets less. Third, there is no evidence that the ABCP exposure per se is driving the reduction of activity outside the US. In sum, our results show that the TAF program spilled over into foreign markets, while highlighting the importance of actively managed internal capital markets and the increased centralization of global banks' liquidity management at the domestic parent during and after the financial crisis.

Suggested Citation

  • Claudia Buch & Catherine Koch & Michael Koetter, 2016. "Crises and rescues: liquidity transmission through international banks," BIS Working Papers 576, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:576
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    Keywords

    Term Auction Facility; international banking; liquidity shock; bank funding structure; ABCP exposure;
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