International Banking and Liquidity Risk Transmission: Evidence from the United Kingdom

Abstract

This paper forms the United Kingdom’s contribution to the International Banking Research Network’s project examining the impact of liquidity shocks on banks’ lending behavior, using proprietary bank-level data available to central banks. Specifically, we examine the impact of changes in funding conditions on U.K.-resident banks’ domestic and external lending from 2006 to 2012. The results suggest that, following a rise in the funding shock measure, U.K.-resident banks that grew their balance sheets quicker relative to their peers precrisis decreased their external lending by more relative to other banks, and increased their domestic lending. When the paper accounts for country of ownership, it finds that the same pattern was true for both U.K.-owned and foreign-owned banks, but more pronounced for U.K.-owned banks’ domestic and foreign-owned banks’ external lending. These results are robust to splitting the data into real and financial sector lending, the use of more granular bilateral country loan data and controlling for government interventions.