Shock Transmission Through International Banks: The Italian Case

Abstract

This paper studies what impact liquidity shocks have on liquid assets and domestic and cross-border lending. In particular, we look for differences across banks depending on their international exposure and we account for the effects of the sovereign debt crisis and the ECB's non-conventional monetary policy measures. Our main findings are that liquid assets are important drivers of lending adjustment to liquidity risk and that this effect is significant for domestic lending but not for foreign lending even considering the characteristics of the destination market. Differences in banks' international exposure play a limited role in the way liquidity shocks are transmitted.

Bank lending in uncertain times

“…Second, the key monetary, regulatory and …scal policy debates that took place in 2002-2012 clearly had a strong international dimension. Third, three quarters of total banking assets in Italy are held by banks with branches or subsidiaries abroad(Caccavaio et al, 2014), and these are likely to respond to uncertainty around the European rather than just the Italian outlook 7. In ‡ation forecasts are useful because they summarize a large number of aggregate demand-and supply-side factors.…”