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 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.

Bibliographic Details

Main Author:	Raddatz, Claudio
Language:	English en_US
Published:	World Bank, Washington, DC 2010-02
Subjects:	ACCESS TO CREDIT, ALTERNATIVE SOURCES OF FINANCING, ALTERNATIVE SOURCES OF FUNDING, ASSET CLASSES, ASSET MANAGERS, ASSET RATIO, ASSET VALUES, ASSETS RATIO, AUCTIONS, BAILOUT, BAILOUTS, BALANCE SHEET, BALANCE SHEETS, BANK ASSETS, BANK BALANCE SHEET, BANK BALANCE SHEETS, BANK CREDIT, BANK DEPOSITS, BANK FINANCING, BANK LIQUIDITY, BANK REGULATION, BANK RUN, BANK SPREADS, BANKING INDUSTRY, BANKING SECTOR, BANKING SYSTEM, BANKRUPTCY, BANKS, BASIS POINTS, BID, BUSINESS CYCLES, CAPITAL ACCOUNT, CAPITAL FLOWS, CAPITAL MARKET, CAPITALIZATION, CDS, CENTRAL BANKS, CERTIFICATES OF DEPOSITS, CHECKS, COMMERCIAL BANKS, COMMERCIAL PAPER, COMMERCIAL PAPER MARKET, CONSUMER DEMAND, COUNTRY COMPARISONS, COUNTRY FIXED EFFECT, COUNTRY FIXED EFFECTS, CREDIT CRUNCH, CREDIT DEFAULT, CREDIT DEFAULT SWAP, CREDIT DEFAULT SWAPS, CREDIT LINES, CREDIT RISK, CURRENCY, CURRENCY CRISES, DEBT, DEFAULTS, DEMAND DEPOSITS, DEPOSIT, DEPOSIT INSURANCE, DEPOSIT INSURANCE COVERAGE, DEPOSIT INSURANCE SCHEMES, DEPOSIT LIABILITIES, DEPOSITOR, DEPOSITORS, DEPOSITS, DEREGULATION, DEVELOPING COUNTRIES, DISINTERMEDIATION, DUMMY VARIABLE, ECONOMETRICS, EQUITY INDEX, EUROPEAN CENTRAL BANK, EXPOSURE, EXTERNAL ASSETS, EXTERNAL FUNDS, FEDERAL RESERVE, FEDERAL RESERVE BANK, FINANCES, FINANCIAL CONSTRAINTS, FINANCIAL CONTAGION, FINANCIAL CRISES, FINANCIAL CRISIS, FINANCIAL DISTRESS, FINANCIAL FRAGILITY, FINANCIAL INNOVATION, FINANCIAL INSTITUTIONS, FINANCIAL INTEGRATION, FINANCIAL MANAGEMENT, FINANCIAL MARKET, FINANCIAL MARKETS, FINANCIAL OPENNESS, FINANCIAL REGULATION, FINANCIAL SECTOR, FINANCIAL STRUCTURE, FINANCIAL SUPPORT, FINANCIAL SYSTEM, FINANCIAL SYSTEMS, FINANCIAL TRANSACTIONS, FIXED INCOME, FIXED INCOME MARKETS, FOREIGN ASSETS, FOREIGN BANK, FOREIGN BANKS, FOREIGN NATIONALS, GLOBAL BANKING, GLOBAL ECONOMY, GLOBAL EQUITY, GLOBALIZATION, GLOBALIZATION OF SECURITIES, GOVERNMENT GUARANTEE, GROWTH RATE, GROWTH RATES, HEDGE FUNDS, HOME MORTGAGE, HOUSING, ILLIQUID ASSETS, ILLIQUIDITY, INCOME DISTRIBUTION, INITIAL LOANS, INSTITUTIONAL INVESTORS, INSURANCE, INSURANCE COMPANY, INTERBANK MARKETS, INTEREST RATES, INTERNATIONAL BANK, INTERNATIONAL BANKS, INTERNATIONAL ECONOMICS, INTERNATIONAL ECONOMIES, INTERNATIONAL FINANCIAL CRISIS, INTERNATIONAL FINANCIAL SYSTEM, INTERNATIONAL MONEY MARKETS, INTERNATIONAL RESERVES, INTERNATIONAL SETTLEMENTS, INTERNATIONAL TRADE, INVESTMENT BANK, INVESTMENT BANKING, INVESTMENT BANKS, INVESTMENT FUNDS, LENDER, LENDERS, LIABILITY, LIQUID ASSETS, LIQUIDITY COSTS, LIQUIDITY CREATION, LIQUIDITY CRUNCH, LIQUIDITY CRUNCHES, LIQUIDITY POSITION, LIQUIDITY RISK, LOAN, LOAN MARKETS, LOCAL CURRENCY, LOW-INCOME COUNTRIES, MACROECONOMICS, MARKET CAPITALIZATION, MARKET CONTAGION, MARKET DISCIPLINE, MARKET LIQUIDITY, MARKET MAKERS, MARKET PARTICIPANTS, MARKET RETURN, MARKET RETURNS, MATURITY, MODERN FINANCIAL SYSTEMS, MONETARY POLICY, MONEY MARKET, MORTGAGE, MORTGAGE COMPANIES, MORTGAGE LENDER, MORTGAGE MARKET, MORTGAGES, MULTINATIONAL, MULTINATIONAL CORPORATIONS, NON-PERFORMING LOANS, OPEN COUNTRIES, POLICY RESPONSES, POLITICAL ECONOMY, PORTFOLIO, POST BANK, PRICE CHANGES, PUBLIC BANKS, PUBLIC POLICY, RATING AGENCIES, RECESSION, REGULATORY FRAMEWORK, REGULATORY SYSTEMS, REPO, REPO MARKET, RETURN, RETURNS, RISK MANAGEMENT, SAFETY NET, SECURITIES, SECURITIES MARKETS, SECURITIZATION, SHORT-TERM FINANCING, SOURCE OF FUNDS, SOURCES OF FUNDS, STATE BANKS, STATE OWNED BANKS, STOCK MARKET, STOCK MARKETS, STOCK PRICE, STOCK PRICES, STOCK RETURNS, STOCKS, TRADES, TRADING, TRANSACTION, TRANSPARENCY, TREASURY, TREASURY BILL, TREASURY BILL RATE, TURNOVER, VOLATILITY, WHOLESALE FUND, WHOLESALE FUNDING, WHOLESALE FUNDS, WHOLESALE MARKETS,
Online Access:	http://documents.worldbank.org/curated/en/2010/02/11771674/rivers-run-dry-liquidity-use-wholesale-funds-transmission-subprime-crisis https://hdl.handle.net/10986/19922
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