Abstract
We examine the impact of heightened liquidity risk in bank funding markets during the 2007-08 subprime crisis on the supply of credit to firms internationally. Our sample comprises almost 800 banks lending in the syndicated loan market to borrowers from 48 advanced and emerging market economies. To control for simultaneous changes in demand, we relate within-borrower changes in lending from multiple banks to banks' exposure to liquidity risk. To capture banks' vulnerability to the liquidity shocks that occurred during 2007-08, we use measures of pre-crisis reliance on wholesale funding. Our results suggest that banks that were more exposed to liquidity risk during the crisis reduced syndicated lending more than other banks. Our results are robust to alternate measures of vulnerability to liquidity risk, choice of sample period, and simultaneous movements in exchange rates.
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