Liquidity Shocks, Dollar Funding Costs, and the Bank Lending Channel During the European Sovereign Crisis

Abstract

This paper documents a new type of cross-border bank lending channel using a novel dataset on the balance sheets of U.S. branches of foreign banks and their syndicated loans. We show that: (1) The U.S. branches of euro-area banks suffered a liquidity shock in the form of reduced access to large time deposits, which prompted them to cut lending to U.S. firms along the extensive margin, negatively affecting corporate investment. (2) The affected branches received additional funding from parent banks, but not enough to offset the lost deposits. (3) The liquidity shock was related to country rather than bank-specific characteristics.