International banking and liquidity risk transmission: lessons from the United Kingdom

This paper forms the United Kingdom’s contribution to the International Banking Research Network’s project examining the impact of liquidity shocks on banks’ lending behaviour, using proprietary bank-level data available to central banks. Specifically, we examine the impact of changes in funding conditions on UK-resident banks’ domestic and external lending from 2006–12. Our results suggest that, following a rise in the liquidity shock measure, UK-resident banks that grew their balance sheets quicker relative to their peers pre-crisis, decreased their external lending by more relative to other banks, and increased their domestic lending. When we account for country of ownership, we find that the same pattern was true for both UK-owned and foreign-owned banks, but more pronounced for UK-owned banks’ domestic and foreign-owned banks’ external lending. These results are robust to splitting the data into real and financial sector lending, the use of more granular bilateral country loan data and controlling for the various banking system interventions made by governments in 2008–09.