Ritz, R. A. and Walther, A.

How do banks respond to increased funding uncertainty?

CWPE1414

Abstract: The 2007-9 .financial crisis began with increased uncertainty over funding conditions in money markets. We show that funding uncertainty can explain diverse elements of commercial banks behaviour during the crisis, including:(i) reductions in lending volumes, balance sheets, and profitability;(ii) more intense competition for retail deposits (including deposits turning into a .loss leader.);(iii) stronger lending cuts by more highly extended banks with a smaller deposit base;(iv) weaker pass-through from changes in the central bank.s policy rate to market interest rates; and(v) a binding .zero lower bound.as well as a rationale for unconventional monetary policy.

Keywords: Bank lending, financial crises, interbank market, interest rate pass-through, liquidity channel, loan-to-deposit ratio, loss leader, monetary policy, zero lower bound

JEL Codes: D40 E43 E52 G21

Author links: Robert Ritz  

PDF: https://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1414.pdf

Open Access Link: https://doi.org/10.17863/CAM.4947

Published Version of Paper: How do banks respond to increased funding uncertainty?, Ritz, R. A. and Walther, A., Journal of Financial Intermediation (2015)

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