Abstract
The balance sheet structure of U.S. banks influences how they respond to liquidity risks. We find the responses differ in fundamental ways across banks without foreign affiliates vs. those with foreign affiliates. Among banks without foreign affiliates, cross-sectional differences in response to liquidity risk depend on the banks’ shares of core deposit funding, Tier 1 capital, and outstanding credit commitments. Among banks with foreign affiliates, the global banks, liquidity management strategies as reflected in internal borrowing and lending across the global organization matter. This intrabank borrowing serves as a shock absorber and affects lending growth to domestic and foreign customers. Across all banks, the use of official sector emergency liquidity facilities tends to reduce the importance of ex ante differences in balance sheets as drivers of cross-sectional differences in lending in response to market liquidity risks.
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Notes
While sometimes referred to as “loans” in the text, claims are actually more broadly defined to include loans and other types of similar assets. A detailed description of this item can be found here: www.ffiec.gov/forms009_009a.htm.
We begin in 2006 due to data availability issues. The FFIEC 009 reporting form, a primary data source in our analysis, was modified in 2006, adding some items to our analysis that were not previously available. Hereafter, we use interchangeably the terms “bank holding company” and “bank,” recognizing that the commercial banks represent only a portion of the holding company.
We further refine the sample by dropping nonbank financial institutions that report the FFIEC 009 and reporters that were added in the first quarter of 2009, and drop observations where the quarterly change in real total assets is greater than 10 percent to account for changes in organizational structure (such as mergers).
The Libor-OIS spread is calculated as the average, within a quarter, difference between the three-month U.S. dollar Libor and the OIS rate for Federal Funds. An alternative measure is the TED spread, used in CMST. Results are largely unchanged if that measure is used as the proxy for aggregate liquidity risks.
The full set of credit and liquidity measures is provided at www.federalreserve.gov/monetarypolicy/bst.htm
We also have run alternative specifications excluding bank fixed effects. In those specifications the β’s capture both absolute and cross-sectional differences in balance sheet composition.
To arrive at this dollar amount, we multiply the growth rate given by the product of the coefficient on the interaction term from Table 3 and the difference in the share of deposits of banks in the selected percentiles, by the total assets of the median bank in the sample of financial institutions that do not have any foreign affiliates.
References
Buch, Claudia M. and Linda Goldberg, 2015, “International Banking and Liquidity Risk Management: Lessons from Across Countries,” International Monetary Fund Economic Review, Vol. 63, No. 3, pp. 377–410.
Cetorelli, Nicola and Linda Goldberg, 2012a, “Banking Globalization and Monetary Transmission,” Journal of Finance, Vol. 67, No. 5, pp. 1811–43.
Cetorelli, Nicola and Linda Goldberg, 2012b, “Follow the Money: Quantifying Domestic Effects of Foreign Bank Shocks in the Great Recession,” American Economic Review, Vol. 102, No. 3, pp. 213–18.
Cetorelli, Nicola and Linda Goldberg, 2012c, “Liquidity Management of U.S. Global Banks: Internal Capital Markets in the Great Recession,” Journal of International Economics, Vol. 88, No. 2, pp. 299–311.
Cornett, Marcia, Jamie McNutt, Philip Strahan, and Hassan Tehranian, 2011, “Liquidity Risk Management and Credit Supply in the Financial Crisis,” Journal of Financial Economics, Vol. 101, No. 2, pp. 297–312.
Kashyap, Anil and Jeremy Stein, 2000, “What Do A Million Observations on Banks Say About the Transmission of Monetary Policy?,” American Economic Review, Vol. 90, No. 3, pp. 407–28.
Additional information
United States Contribution to the 2013 International Banking Research Network (IBRN).
*Ricardo Correa is the Chief of the International Financial Stability Section at the Federal Reserve Board. Linda Goldberg is Vice President of Financial Intermediation at the Federal Reserve Bank of New York. Tara Rice is in the Division of International Finance at the Federal Reserve Board. The authors thank Jason Goldrosen for excellent research assistance and thank anonymous referees, Claudia Buch, Ben Craig, Pierre-Olivier Gourinchas, Katheryn Russ, Charles Thomas, participants at the International Banking Research Network workshops in Potsdam and Paris, seminar participants at the U.S. Treasury and at the Financial Stability Group Seminar in Lima, Peru for thoughtful suggestions. The views expressed in this paper are solely those of the authors and should not be interpreted as reflecting the view of the Board of Governors, Federal Reserve Bank of New York, or the staff of the Federal Reserve System.
An erratum to this article is available at http://dx.doi.org/10.1057/s41308-017-0034-4.
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Correa, R., Goldberg, L. & Rice, T. International Banking and Liquidity Risk Transmission: Evidence from the United States. IMF Econ Rev 63, 626–643 (2015). https://doi.org/10.1057/imfer.2015.28
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DOI: https://doi.org/10.1057/imfer.2015.28