International Banking and Liquidity Risk Transmission: Evidence from Austria

Abstract

This study provides findings on the transmission of liquidity shocks by Austrian parent banks through the lending channel. The paper investigates how different types of banks adjust their balance sheet positions in response to a liquidity shock. It distinguishes between different definitions of lending activities, such as changes in domestic C&I lending, foreign C&I lending, total credit, cross-border claims, foreign offices local claims, and internal borrowing between affiliated banks. The paper finds that (1) smaller banks (parent banks without affiliates) response to liquidity risk depends on core deposit funding for foreign C&I lending and total credit. (2) Cross-sectional differences in large banks (parent banks with affiliates) in response to liquidity risk cannot be uniformly explained by one particular ex ante determinant. The growth of cross-border claims is negatively correlated with a higher share of illiquid assets and with a higher share of capital, and positively correlated with the commitment ratio. Use of official sector liquidity provided by the Austrian government reduces the importance of the commitments share as a driver of cross-sectional differences in lending by Austrian global banks in response to market liquidity risks.