Tracing the Impact of Central Bank Liquidity Infusions on Financially Constrained Banks: Evidence from a Natural Experiment

Abstract

Using data on foreign borrowing, I identify Russian banks that were by the sudden stop of external financing caused by the Lehman Brothers’collapse. Applying the difference-in-difference method, I compare these affected banks to ones and find that the Russian Central Bank’s (CBR) anti-crisis financial assistance primarily went to the former group. Tracing the impact of the CBR’s liquidity infusions on banks’portfolio allocation decisions, I find that banks used CBR funds not only to pay out foreign debt, but also to accumulate cash deposits in non-resident banks. I also find that banks increased their holdings of market securities significantly more than unaffected ones, which suggests that the CBR’s bailout policies impacted their risk-taking strategies. While there was no significant difference in corporate lending growth between the two groups after the sudden stop, lending to borrowers with weaker banking relationships (individuals and entrepreneurs) decreased more among banks. JEL classification: G21, E58