When the Rivers Run Dry : Liquidity and the Use of Wholesale Funds in the Transmission of the U.S. Subprime Crisis
This paper provides systematic evidence of the role of banks' reliance on wholesale funding in the international transmission of the ongoing financial crisis. It conducts an event study to estimate the impact of the liquidity crunch of Septemb...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Online Access: | http://documents.worldbank.org/curated/en/2010/02/11771674/rivers-run-dry-liquidity-use-wholesale-funds-transmission-subprime-crisis http://hdl.handle.net/10986/19922 |
| Summary: | This paper provides systematic evidence
of the role of banks' reliance on wholesale funding in
the international transmission of the ongoing financial
crisis. It conducts an event study to estimate the impact of
the liquidity crunch of September 15, 2008, on the stock
price returns of 662 individual banks across 44 countries,
and tests whether differences in the abnormal returns
observed around those events relate to these banks'
ex-ante reliance on wholesale funding. Globally and within
countries, banks that relied more heavily in non-deposit
sources of funds experienced a significantly larger decline
in stock returns even after controlling for other
mechanisms. Within a country, the abnormal returns of banks
with high wholesale dependence fell about 2 percent more
than those of banks with low dependence during the three
days following Lehman Brothers' bankruptcy. This large
differential return suggests that liquidity played an
important role in the transmission of the crisis. |
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