International banking and liquidity risk transmission: Evidence from Germany

Abstract

This paper explores the lending business and internal capital markets of German banks during periods of liquidity stress and government support. The analysis yields three key findings. First, when liquidity conditions deteriorate, cross-sectional differences in balance sheet characteristics impact the responses while reflecting the respective business models and geographical focus of large as distinct from small banks. Second, large and small banks, on the whole, shift lending away from international markets to the domestic market when drawing on government support during periods of liquidity stress. These findings point to the bank-specific requirements attached to the receipt of government support. Third, government support did not prevent banks focused on the domestic market from transmitting liquidity shocks to their affiliated banks abroad.