Foreign Banks, Liquidity Shocks, and Credit Stability

Abstract

This paper investigates whether foreign banks help mitigate the effects of domestic liquidity shocks by exploiting a policy-induced shock to the U.S. wholesale market for liquidity and matched bank-syndicated loan data. We find that, following the 2011 Federal Deposit Insurance Corporation (FDIC) regulatory change to the cost of wholesale liquidity, foreign banks, which faced a relatively positive liquidity shock, accumulated more reserves by engaging in liquidity hoarding, but did not expand their lending. These responses are more pronounced for foreign banks affiliated with complex global bank holding companies and whose parent banking systems experienced distress at the moment of the shock.