This paper studies what impact liquidity shocks have on liquid assets and domestic and cross-border lending. In particular, we look for differences across banks depending on their international exposure and we account for the effects of the sovereign debt crisis and the ECB’s non-conventional monetary policy measures. Our main findings are that liquid assets are important drivers of lending adjustment to liquidity risk and that this effect is significant for domestic lending but not for foreign lending even considering the characteristics of the destination market. Differences in banks’ international exposure play a limited role in the way liquidity shocks are transmitted.
Published in 2015 in: IMF Economic Review, v. 63, 3, pp. 568-584.
