Assets and Liabilities Correlated F ragilities
Abstract:
Banks are providers of liquidity on demand not onl y to the liability side but also to the asset side through credit lines. Ar e the liquidity risks on the two sides of the balance sheet correlated? Doe s this correlation induce a double liquidity squeeze during a financial cri sis? We answer these questions analyzing the liquidity freeze out in the Eu ropean interbank market in August 2007. For identification, we use the Ital ian credit register which records all credit lines and loans to firms. We m atch the data of bank-firm relations with firm-level and supervisory bank l evel data. We show within-firm evidence that, after the shock, firms with c redit lines from multiple banks draw down more from the banks with higher p re-crisis exposure to the interbank market. Effects are stronger for smalle r firms and for less liquid and smaller banks. Our results suggest that dra wdowns are carried out by firms in anticipation of future credit supply res trictions, which we show in fact to be stronger for banks more exposed to t he interbank market. However, when we analyze the aggregate bank level resu lts without controlling for firm fixed effects or observables, we find that more interbank exposed banks do not experience higher drawdowns on their c redit lines relatively to less exposed banks. This suggests that banks are able to neutralize this source of fragility by selecting borrowers who tend to draw down less during a financial crisis. In fact, we find that banks w ith higher interbank exposure grant less credit lines ex-ante, and especial ly to observable riskier firms. This evidence suggests effective ex-ante li quidity risk management by banks, and is consistent with Hanson, Shleifer, Stein and Vishny (2014) who show that financial institutions with less stab le sources of funding select assets with lower liquidity risk.
DTSTAMP:20260421T173602Z DTSTART:20141014T130000Z DTEND:20141014T140000Z SEQUENCE:0 TRANSP:OPAQUE END:VEVENT END:VCALENDAR