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Liquidity shocks, dollar funding costs, and the bank lending channel during the European sovereign crisis

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  • Ricardo Correa
  • Horacio Sapriza
  • Andrei Zlate

Abstract

This paper documents a new type of cross-border bank lending channel. The deepening of the European sovereign debt crisis in 2011 restrained the financial intermediation of European banks in the United States. In this period, some of the U.S. branches of European banks faced a dollar liquidity shock—due to their perceived risk reflecting the sovereign risk of their countries of origin—which in turn affected the branches’ lending to U.S. entities. We use a novel dataset to analyze the operations of branches of foreign banks in the United States. Our results show that: (1) The U.S. branches of European banks experienced a run on their deposits, mainly from U.S. money market funds. (2) The branches with curtailed access to large time deposits relied more on funding from their own parent institutions, thus shifting from being net suppliers to being net receivers of dollar funding from their related offices. (3) Since the additional funding received from parent institutions was not enough to offset the decreased access to U.S. funding, such branches reduced their lending to U.S. entities.

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  • Ricardo Correa & Horacio Sapriza & Andrei Zlate, 2012. "Liquidity shocks, dollar funding costs, and the bank lending channel during the European sovereign crisis," International Finance Discussion Papers 1059, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:1059
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    Cited by:

    1. Yoshiko Suzuki, 2016. "European banks' funding realignment during the European debt crisis: impact of counterparty risk and funding liquidity on FX swap pricing," Economics Bulletin, AccessEcon, vol. 36(2), pages 696-703.
    2. Radev, Deyan & Gropp, Reint, 2014. "The Internal Organization of Banks and the Transmission of Lending Shocks Across Borders," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100349, Verein für Socialpolitik / German Economic Association.
    3. Punzi, Maria Teresa & Kauko, Karlo, 2015. "Testing the global banking glut hypothesis," Journal of Financial Stability, Elsevier, vol. 19(C), pages 128-151.
    4. Correa, Ricardo & Goldberg, Linda & Rice, Tara, 2014. "Liquidity Risk and U.S. Bank Lending at Home and Abroad," International Finance Discussion Papers 1105, Board of Governors of the Federal Reserve System (U.S.).
    5. Lawrence L Kreicher & Robert N McCauley & Patrick McGuire, 2013. "The 2011 FDIC assessment on banks managed liabilities: interest rate and balance-sheet responses," BIS Working Papers 413, Bank for International Settlements.
    6. Everett, Mary M., 2015. "International liquidity and the European sovereign debt crisis: Was euro area unconventional monetary policy successful?," HIT-REFINED Working Paper Series 23, Institute of Economic Research, Hitotsubashi University.
    7. Mary M. Everett, 2015. "International liquidity shocks and the European sovereign debt crisis: Was euro area unconventional monetary policy successful?," FIW Working Paper series 143, FIW.
    8. Cerutti, Eugenio & Hale, Galina & Minoiu, Camelia, 2015. "Financial crises and the composition of cross-border lending," Journal of International Money and Finance, Elsevier, vol. 52(C), pages 60-81.
    9. Bertaut, Carol C. & Tabova, Alexandra M. & Wong, Vivian, 2014. "The Replacement of Safe Assets: Evidence from the U.S. Bond Portfolio," International Finance Discussion Papers 1123, Board of Governors of the Federal Reserve System (U.S.).
    10. Brauning, Falk & Puria, Kovid, 2017. "Uncovering covered interest parity: the role of bank regulation and monetary policy," Current Policy Perspectives 17-3, Federal Reserve Bank of Boston.
    11. Lamers, Martien, 2015. "Depositor discipline and bank failures in local markets during the financial crisis," Research Report 15007-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    12. Carlson, Mark A. & Rose, Jonathan D., 2016. "Can a Bank Run Be Stopped? Government Guarantees and the Run on Continental Illinois," Finance and Economics Discussion Series 2016-3, Board of Governors of the Federal Reserve System (U.S.).
    13. Jean Barthélémy & Vincent Bignon & Benoît Nguyen, 2017. "Illiquid Collateral and Bank Lending during the European Sovereign Debt Crisis," EconomiX Working Papers 2017-21, University of Paris Nanterre, EconomiX.
    14. Robert N McCauley & Patrick McGuire, 2014. "Non-US banks' claims on the Federal Reserve," BIS Quarterly Review, Bank for International Settlements, March.
    15. De Bruyckere, Valerie & Gerhardt, Maria & Schepens, Glenn & Vander Vennet, Rudi, 2013. "Bank/sovereign risk spillovers in the European debt crisis," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4793-4809.
    16. Brauning, Falk & Ivashina, Victoria, 2016. "Monetary policy and global banking," Working Papers 17-5, Federal Reserve Bank of Boston.
    17. Tümer Kapan & Camelia Minoiu, 2013. "Balance Sheet Strength and Bank Lending During the Global Financial Crisis," IMF Working Papers 13/102, International Monetary Fund.
    18. Ferrando, Annalisa & Popov, Alexander & Udell, Gregory F., 2015. "Sovereign stress, unconventional monetary policy, and SME access to finance," Working Paper Series 1820, European Central Bank.
    19. Acharya, Viral V & Eisert, Tim & Eufinger, Christian & Hirsch, Christian, 2014. "Real Effects of the Sovereign Debt Crisis in Europe: Evidence from Syndicated Loans," CEPR Discussion Papers 10108, C.E.P.R. Discussion Papers.
    20. Mary M. Everett, 2015. "Blowing the Bubble: The Global Funding of the Irish Credit Boom," The Economic and Social Review, Economic and Social Studies, vol. 46(3), pages 339-365.
    21. Correa, Ricardo & Sapriza, Horacio, 2014. "Sovereign Debt Crises," International Finance Discussion Papers 1104, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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