In the wake of the Crisis, policymakers have introduced liquidity regulation to promote the resilience of banks and lower the social cost of crisis management. This column shows that a funding liquidity shock, manifested as lower access to wholesale sources of funding following a credit rating downgrade, translates into a significant decline in both domestic and foreign lending. Liquidity self-insurance by banks mitigates the impact of a credit rating downgrade on lending.
Philippe Karam, Ouarda Merrouche, Moez Souissi, Rima Turk, Monday, February 2, 2015
Dennis Reinhardt, Steven Riddiough, Wednesday, May 7, 2014
Cross-border funding between banks collapsed following the bankruptcy of Lehman Brothers, but the withdrawal of funding was not uniform across countries. This column argues that the composition of cross-border bank-to-bank funding can help to explain why. Interbank funding between unrelated banks is particularly vulnerable to global shocks, but intragroup funding between related banks can act as a stabilising force, particularly for advanced economies with a high share of global parent banks. Policymakers should look at disaggregated cross-border bank-to-bank flows, as doing otherwise could result in a misleading assessment of financial stability risks.
Claudio Raddatz, Monday, March 15, 2010
How did a seemingly small shock to the US financial markets manage to spread so far, so quickly? This column argues that the heavy reliance on short-term wholesale funding is to blame. It follows that the discussions of regulatory reform should focus on the risks associated with the liability structure of banks.