Cross-border transmission of emergency liquidity

Abstract

Reproduction permitted only if source is stated. ISBN Non-technical summary Research QuestionIn response to the global financial crisis, the Federal Reserve Bank (Fed ) established several emergency facilities during the period from December 2007 to April 2010 peaking at USD 1.2 trillion at the end of 2008. The emergency facilities aimed at lifting liquidity constraints and mitigating bank lending contraction. Funds from the emergency facilities were accessible to U.S. banks as well as subsidiaries of foreign banks. The latter are parts of internal capital markets of internationally active bank holding companies (IBHCs). This study asks whether unconventional U.S. monetary policy in terms of emergency facilities transmitted to banking markets outside the U.S. and changed interest rate setting behavior. ContributionWith this analysis, we contribute to the literature on the cross-border transmission of monetary policy by examining the link between the Fed emergency facilities and the legal framework in which non-U.S. banks have access to them. The study employs detailed information on the use of emergency liquidity of U.S. banks that had not been available prior to 2011 due to restrictions by the Fed. The data allow us to differentiate between German banks with access to the U.S. liquidity support and banks without access. Our approach compares interest rates of both groups of banks during the period in which the emergency facilities were active and the surrounding period. ResultsWe find a significant, contemporaneous decline in the short-term deposit rates of banks with access to the U.S. liquidity facilities compared to banks without access to these funding sources. Banks with access to these facilities show significantly decreased shortterm funding costs, while both credit pricing and lending volumes remain unchanged. Short-term corporate loan rates decline as well with a lag between two to four months. These spillover effects of U.S. monetary policy are confined to short-term rates. AbstractWe show that emergency liquidity provision by the Federal Reserve transmitted to non-U.S. banking markets. Based on manually collected holding company structures of international banks, we can identify banks in Germany with access to U.S. facilities via internal capital markets. Using proprietary interest rate data reported to the German central bank, we compare lending and borrowing rates of banks with and without such access. U.S. liquidity shocks cause a significant decrease in the short-term funding costs of German banks with access. Short-term loan rates charged to German corporates also decline, albeit with lags between two and four months. These spillover effects of U.S. monetary policy are confined to short-term rates.

Big fish in small banking ponds? Cost advantage and foreign affiliate presence

“…The estimated cost advantage effects remain qualitatively stable, but they become smaller in magnitude. The estimated marginal effects of bank-specific covariates suggest that less profitable, less stable, and larger banks are more likely to operate foreign affiliates, which does not bode well considering affiliates' importance in propagating shocks (Cetorelli and Goldberg, 2012a;Kick et al, 2016). So far we have neglected the important insights from theoretical work by De Blas and Russ (2013) and Niepmann (2015Niepmann ( , 2016 that both competitive conditions in potential host markets as well as heterogeneous factor endowments across countries are crucial determinants of cross-border banking activities in general, and the entry choice of bank affiliates in particular.…”

“…Standard errors are clustered at the country level. We prefer this estimator to mitigate the zero-inflation bias in discrete regression settings (see King and Zeng, 2001;Baetschmann and Winkelmann, 2013;or Winkelmann and Staub, 2013). 13 To assess the relative importance of cost leadership in explaining foreign presence, we specify in Table 3 different (combinations of) fixed effects, bank-, and country-specific control variables.…”

The Ownership Structure, Capital and Bank Lending in Times of Crisis: Islamic Banks versus Conventional Banks

“…This is especially true of banks that have low capital and liquidity. Kick et al (2018); Temesvary and Banai (2017) showed that banks with a lower capital to asset ratio, a high non-performing loan ratio and a lack of emergency liquidity tend to lower the lending growth. In addition, Popov and Udell (2012) documented that firms have been affected that attempted to get access to credit from banks that did not have steady capital, especially subsidiary banks.…”