“The recent financial crisis underscored the importance of understanding how liquidity conditions for banks (or other financial institutions) influence the banks’ lending to domestic and foreign customers. Our recent research examines the domestic and international lending responses to liquidity risks across different types of large U.S. banks before, during, and after the global financial crisis. The analysis compares large global U.S. banks—that is, those that have offices in foreign countries and are able to move liquidity from affiliates across borders—with large domestic U.S. banks, which have to rely on financing raised in capital markets and from depositors to extend credit and issue loans. One key result of our study, detailed below, is that the internal liquidity management by global banks has, on average, mitigated the effects of aggregate liquidity shocks on domestic lending by these banks.

Possible Bank Responses to Liquidity Risks – Large U.S.-based banks can react to aggregate liquidity shocks by adjusting their domestic lending, their cross-border lending (for example, interbank loans or claims on other counterparties), or their internal lending and borrowing (with affiliates), or potentially make other balance sheet adjustments. The reaction to aggregate liquidity conditions could depend, importantly, on the composition and strength of each bank’s balance sheet. For example, if a bank has stable deposit funding or maintains more liquid assets on its balance sheet, its lending might be less affected by aggregate liquidity shocks.”