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Asymmetric transmission of a bank liquidity shock
Institution:1. Fundação Getulio Vargas–EAESP, Av. Nove de Julho 2029, Bela Vista, 01313-902, Sao Paulo, SP, Brazil;2. Depep, Banco Central do Brasil and Fundação Escola de Comércio Álvares Penteado (Fecap), Brazil;1. NYU Stern School of Business, Volatility Institute, 44 West 4th Street, New York, NY 10012, United States;2. Université catholique de Louvain, ISBA, 20 Voie du Roman Pays, B-1348 Louvain-La-Neuve, Belgium;1. Stern School of Business, New York University, Henry Kaufman Management Center, 44 West 4th Street, Suite 9-190, New York, NY 10012-1126, United States;2. Fox School of Business, Temple University, United States;3. John Molson School of Business, Concordia University, 1455 De Maisonneuve Blvd. West, MB 12-235, Montreal, Quebec, H3G 1M8, Canada;4. Charlton College of Business, University of Massachusetts Dartmouth, 285 Old Westport Road, North Dartmouth, MA 02747, United States;5. Carey Business School, Johns Hopkins University, 100 International Drive, Baltimore, MD 21202, United States;1. Federal Reserve Bank of Cleveland, Ohio, United States;2. Oberlin College, Ohio, United States;1. Weatherhead School of Management, Case Western Reserve University, 11119 Bellflower Road, Cleveland, OH 44106, United States;2. Federal Reserve Bank of Cleveland, 1455 E 6th St., Cleveland, OH 44114, United States;3. Baden-Wuerttemberg Cooperative State University, Marienstraße 20, 89518 Heidenheim, Germany;4. Department of Economics, Hanken School of Economics, Arkadiankatu 7, FI-00100 Helsinki, Finland;5. RiskLab Finland at Arcada University of Applied Sciences, Jan-Magnus Janssons Plats 1, Fi-00560 Helsinki, Finland
Abstract:We investigate whether banks that receive a positive liquidity shock make up for the reduction in the amount of credit supplied by banks that suffer a negative liquidity shock. For identification, we use the exogenous shock to the Brazilian banking system caused by the international turmoil of 2008 that sparked a run on small and medium banks toward systemically important banks. We find that a reduction in liquidity causes banks to strongly decrease their loan supply, whereas a positive liquidity shock has a small (if any) effect on the loan supply. Our evidence shows that this asymmetric effect of liquidity on the loan supply occurs both at the intensive and the extensive margins. Our findings are consistent with the theories that predict that borrowers face switching costs and that banks tend to hold on to liquidity during periods of systemic uncertainty.
Keywords:Bank lending channel  Credit supply  Financial crisis  Liquidity shock  Financial intermediation
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