Ritz, R. A. and Walther, A.

How do banks respond to increased funding uncertainty?

Journal of Financial Intermediation

Vol. 24(3) pp. 386-410 (2015)

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’ behavior 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, Loan-to-deposit ratio, Monetary policy, Zero lower bound

Author links: Robert Ritz  

Publisher's Link: https://doi.org/10.1016/j.jfi.2014.12.001

Cambridge Working Paper in Economics Version of Paper: How do banks respond to increased funding uncertainty?, Ritz, R. A. and Walther, A., (2014)