Lenders on the storm of wholesale funding shocks: saved by the central bank?

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. We find that banks respond to wholesale funding shocks in several ways. Household and corporate loan growth rates decline and interest rates increase in response to a fall in wholesale funding growth (and vice versa), being either interbank funding or securities issuance. Corporate lending growth and interest rates are more sensitive to wholesale funding conditions than household lending growth and interest rates. The intuition behind this is that a wholesale funding shock forces banks to adjust their asset side quickly, both in terms of size and in terms of risk. Banks realise this adjustment by changing their corporate lending rather than their household lending, since in general the former has a shorter maturity and a higher risk profile than the latter. The response of loan growth to a shock in securities funding is less so on lending rates. Bank size is a determining factor for the transmission of wholesale funding shocks. Lending by large banks that are typically more dependent on wholesale funding, responds more strongly to a shock in securities funding compared to lending by small banks. Likewise, lending by banks with greater exposures to government bonds responds stronger than lending by banks with limited government exposure. Terms of use: Documents inAll in all, the results show that funding liquidity risk is a determining factor in monetary transmission and that bank characteristics determine the extent to which this channel is at work. Moreover, there is some evidence that central bank borrowing shielded bank lending from shocks in wholesale funding markets to some extent. From this we conclude that the unconventional monetary policy measures of the Eurosystem, notably the unlimited provision of liquidity to banks, has contributed to support private credit growth.

Financial fragmentation and SMEs’ access to finance

“…First, financial fragmentation can lead to a decline in credit flows across countries that ultimately reduces the availability of funds (Emter et al, 2018) and increases the cost of lending (Bremus and Neugebauer, 2018) for SMEs. Second, credit market fragmentation can reduce also domestic lending if the funding conditions of domestic banks deteriorate (De Haan et al, 2017) as cross-border interbank credit becomes scarce (Fecht et al, 2012).…”

The Impact of Central Bank Liquidity Support on Banks’ Balance Sheets

“…García-Posada and Marchetti (2016) likewise show that VLTROs had a positive moderate-sized effect on the supply of bank credit to firms and also found that the operations in fact decreased the probability of renewing old lending relationships, which the authors interpret as evidence that funds were not used for loan evergreening. De Haan et al (2017) find evidence suggesting that VLTROs mitigated the negative effects of wholesale liquidity supply shocks on euro area bank lending to the non-financial sector. Likewise, for Italy, Casiraghi et al (2013) find that the 3 year LTROs have had a beneficial impact on credit supply and money market conditions.…”