Discussion Paper Details

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Title: The Transmission of Liquidity Shocks: Evidence from Credit Rating Downgrades

Author(s): Philippe Karam, Ouarda Merrouche, Moez Souissi and Rima Turk

Publication Date: November 2014

Keyword(s): credit ratings, credit supply, internal capital markets, liquidity management and multinational banks

Programme Area(s): Financial Economics

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.

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Bibliographic Reference

Karam, P, Merrouche, O, Souissi, M and Turk, R. 2014. 'The Transmission of Liquidity Shocks: Evidence from Credit Rating Downgrades'. London, Centre for Economic Policy Research.