Working Paper: CEPR ID: DP9457
Authors: Viral V. Acharya; Gara Afonso; Anna Kovner
Abstract: In August of 2007, banks faced a freeze in funding liquidity from the asset-backed commercial paper (ABCP) market. We investigate how banks scrambled for liquidity in response to this freeze and its implications for the real economy. Commercial banks in the United States raised deposits and took advances from Federal Home Loan Banks (FHLBs). In contrast, foreign banks ? with limited access to the deposit market and FHLB advances ? lent less in the overnight interbank market and borrowed more from the Federal Reserve?s Term Auction Facility (TAF) auctions. Relative to before the ABCP freeze and relative to their non US dollar lending, foreign banks with ABCP exposure charged higher interest rates on syndicated loan packages denominated in dollars. The results point to a funding risk in global banking, manifesting as currency shortages for banks engaged in maturity transformation in foreign countries.
Keywords: ABCP freeze; credit crunch; liquidity
JEL Codes: G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ABCP freeze (F32) | differential access to funding (I24) |
| differential access to funding (I24) | US banks maintain liquidity (G21) |
| differential access to funding (I24) | foreign banks reduce lending in the interbank market (F65) |
| ABCP freeze (F32) | foreign banks borrow more from the Federal Reserve's Term Auction Facility (TAF) (F65) |
| funding challenges (I22) | foreign banks charge higher spreads on USD-denominated syndicated loans (F65) |