Working Paper: CEPR ID: DP10252
Authors: Philippe Karam; Ouarda Merrouche; Moez Souissi; Rima Turk
Abstract: We analyze the transmission of bank-specific liquidity shocks triggered by a credit rating downgrade through the lending channel. Using bank-level data for US Bank Holding Companies, we find that a credit rating downgrade is associated with an immediate and persistent decline in access to non-core deposits and wholesale funding, especially during the global financial crisis. This translates into a reduction in lending to households and non-financial corporates at home and abroad. The effect on domestic lending, however, is mitigated when banks (i) hold a larger buffer of liquid assets, (ii) diversify away from rating-sensitive sources of funding, and (iii) activate internal liquidity support measures. Foreign lending is significantly reduced during a crisis at home only for subsidiaries with weak funding self-sufficiency.
Keywords: credit ratings; credit supply; internal capital markets; liquidity management; multinational banks
JEL Codes: E51; F23; F34; F36; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| internal liquidity support measures (E51) | insufficient to offset decline in external funding (H69) |
| credit rating downgrade (F34) | decline in access to noncore deposits (G21) |
| credit rating downgrade (F34) | decline in wholesale funding (F65) |
| decline in access to noncore deposits (G21) | reduction in domestic lending (G21) |
| decline in wholesale funding (F65) | reduction in foreign lending (F34) |
| credit rating downgrade (F34) | decline in domestic lending (F65) |
| credit rating downgrade (F34) | decline in foreign lending (F65) |
| credit rating downgrade (F34) | decline in external funding (F35) |