Liquidity dried up during the financial crisis of 2007–2009. Banks that relied more heavily on core deposit and equity capital financing, which are stable sources of financing, continued to lend relative to other banks. Banks that held more illiquid assets on their balance sheets, in contrast, increased asset liquidity and reduced lending. Off-balance sheet liquidity risk materialized on the balance sheet and constrained new credit origination as increased takedown demand displaced lending capacity. We conclude that efforts to manage the liquidity crisis by banks led to a decline in credit supply

We analyze proprietary internal capital allocation data from a large retail banking group consisting of member banks and a headquarters organization. We find that capital allocations from headquarters compensate for deposit shortfalls on the bank level, suggesting that the headquarters offers deposit smoothing to member banks. We then analyze how the distribution of influence within the group relates to capital allocations and lending behavior. More influential banks are allocated more funds from headquarters, and their loan growth is less sensitive to their deposit base. The effects of influence are stronger if banks have a greater demand for deposit smoothing

[We analyze proprietary internal capital allocation data from a large retail banking group consisting of member banks and a headquarters organization. We find that capital allocations from headquarters compensate for deposit shortfalls on the bank level, suggesting that the headquarters offers deposit smoothing to member banks. We then analyze how the distribution of influence within the group relates to capital allocations and lending behavior. More influential banks are allocated more funds from headquarters, and their loan growth is less sensitive to their deposit base. The effects of influence are stronger if banks have a greater demand for deposit smoothing

[We explore whether central bank intervention improves liquidity in the interbank market during the current subprime crisis with unique trade and quote data from the e-MID, the only regulated electronic interbank market in the world. Central bank intervention consistently creates greater uncertainty in the interbank market. Prior to the crisis, the cover-to-bid ratio effectively conveys good and bad news from the central bank, but this link is broken during the crisis, suggesting that standard (and special) interventions that do not specifically target interbank asymmetric information fail to improve market liquidity. Our results suggest that the central bank should release stress tests for individual banks, provide interbank loan guarantees, or engage in direct asset purchases rather than simply providing more capital when counterparty risk poses systemic risk to the interbank market

We explore whether central bank intervention improves liquidity in the interbank market during the current subprime crisis with unique trade and quote data from the e-MID, the only regulated electronic interbank market in the world. Central bank intervention consistently creates greater uncertainty in the interbank market. Prior to the crisis, the cover-to-bid ratio effectively conveys good and bad news from the central bank, but this link is broken during the crisis, suggesting that standard (and special) interventions that do not specifically target interbank asymmetric information fail to improve market liquidity. Our results suggest that the central bank should release stress tests for individual banks, provide interbank loan guarantees, or engage in direct asset purchases rather than simply providing more capital when counterparty risk poses systemic risk to the interbank market

This paper examines the relationship between bank lending rates and their cost of funds in New Zealand. Our results show that on average mortgage rates respond more quickly to changes in the cost of funds than base business lending rates. We also find an asymmetry in the initial (short-run) response of banks to changes in funding costs; in particular, our results show banks adjust mortgage rates downwards faster than upwards. The speed to which lending rates revert back to their equilibrium relationship with funding costs varies across the lending markets. We find the adjustment speed is faster when mortgage rates are below equilibrium, whereas it is slower when business lending rates are above long-run levels in relation to funding costs. Our analysis suggests that banks prefer the plain-vanilla type of lending such as mortgages in comparison to small business lending consistent with asymmetric information associated with business loans

We study the effect of local market bank concentration on business loan originations and on the pass-through of the federal funds rate to business loan originations. Economic theory on the relationship between concentration and the pass-through of input prices to quantity (or price) is ambiguous. We find that more concentrated markets have lower business loan originations and experience smaller changes in business loan originations in response to changes in the federal funds rate. Our results support the idea that market concentration dampens quantity reactions to input price changes

We document a significant investment bank fixed effect in the announcement returns of M&A deals. The interquartile range of bank fixed effects is 1.26%, compared with a full-sample average return of 0.72%. The results remain significant after controlling for the component of returns attributable to the acquirer. Our findings suggest that investment banks matter for M&A outcomes, and contrast earlier studies that show no positive link between various measures of advisor quality and M&A returns. Differences in average returns across banks are also persistent over time and predictable from prior performance. Clients do not chase past returns, which may explain why persistence exists in M&A performance while it is absent in mutual funds

[We document a significant investment bank fixed effect in the announcement returns of M&A deals. The interquartile range of bank fixed effects is 1.26%, compared with a full-sample average return of 0.72%. The results remain significant after controlling for the component of returns attributable to the acquirer. Our findings suggest that investment banks matter for M&A outcomes, and contrast earlier studies that show no positive link between various measures of advisor quality and M&A returns. Differences in average returns across banks are also persistent over time and predictable from prior performance. Clients do not chase past returns, which may explain why persistence exists in M&A performance while it is absent in mutual funds

Scholars differ on whether central bank intervention mitigates banking panics. In April 1929, a fruit fly infestation in Florida forced the U.S. government to quarantine fruit shipments from the state and destroy infested groves. In July, depositors panicked in Tampa and surrounding cities. The Federal Reserve Bank of Atlanta rushed currency to member banks beset by runs. We show that this intervention arrested the panic and estimate that bank failures would have been twice as high without the Federal Reserve’s intervention. Our results suggest that similar interventions may have reduced bank failures during the Great Depression