International Finance Discussion Papers (IFDP)

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April 2019

Liquidity Funding Shocks: The Role of Banks' Funding Mix

Antonio Álvarez, Alejandro Fernandez, Joaquin Garcia-Cabo, and Diana Posada

Abstract:

This study attempts to evaluate the impact of an increase in banks' funding stress and its transmission to the real economy, taking into account different funding sources banks can rely on. Using aggregate data from eight Euro area financial systems, we find that following a liquidity funding shock, both credit and GDP decline in different amounts and lengths. GDP reverts faster than credit. Furthermore, periphery countries experience a more pronounced fall in deposits and credit growth and the negative effects from the shock last longer than in core countries. Banks' funding seems to play a relevant role as periphery countries rely more on wholesale funding during normal times.

Keywords: Liquidity funding shocks, ECB policy, Euro Area

DOI: https://doi.org/10.17016/IFDP.2019.1245

PDF: Full Paper

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Last Update: January 09, 2020