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What are the real effects of financial market liquidity? Evidence on bank lending from the euro area

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  • Dombret, Andreas R.
  • Foos, Daniel
  • Pliszka, Kamil
  • Schulz, Alexander

Abstract

We analyze the impact of market liquidity on bank lending in the euro area over the period 2003–16 and find that market liquidity is positively related to aggregate loan volumes and negatively related to average credit spreads. This relation is stronger during crisis times and asymmetric so as the impact of a reduction in liquidity is more significant. Results are confirmed on the individual bank level and strongest for non-listed and less profitable banks. This implies that properly functioning and sufficiently liquid financial markets are necessary to avoid negative consequences of restrictions in bank lending for the real economy.

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  • Dombret, Andreas R. & Foos, Daniel & Pliszka, Kamil & Schulz, Alexander, 2019. "What are the real effects of financial market liquidity? Evidence on bank lending from the euro area," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 62(C), pages 152-183.
    • Handle: RePEc:eee:intfin:v:62:y:2019:i:c:p:152-183
    DOI: 10.1016/j.intfin.2019.07.002
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    Cited by:

    1. Pliszka, Kamil, 2021. "System-wide and banks' internal stress tests: Regulatory requirements and literature review," Discussion Papers 19/2021, Deutsche Bundesbank.
    2. Inekwe, John Nkwoma, 2020. "Liquidity connectedness and output synchronisation," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 66(C).
    3. Bevilacqua, Mattia & Duygun, Meryem & Vioto, Davide, 2023. "The impact of COVID-19 related policy interventions on international systemic risk," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 89(C).
    4. Wen, Bohui & Bi, ShaSha & Yuan, Ming & Hao, Jing, 2023. "Financial constraint, cross-sectoral spillover and systemic risk in China," International Review of Economics & Finance, Elsevier, vol. 84(C), pages 1-11.

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    More about this item

    Keywords

    Financial markets; Bank lending; Liquidity risk;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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