We investigate how differential exposures by German banks to the US real-estate market affect domestic lending in Germany when home prices started to decline in the USA. We find that banks with an exposure to the US real-estate sector and to conduits shift their domestic lending to industry–region combinations with lower insolvency ratios following a decrease in US home prices. These banks also contract their lending to German firms more than banks that do not have such exposure. We mainly document that possible losses abroad shift bank lending at home where the size of the effect depends on the type and the degree of exposure the bank has.

This paper examines the relationship between central bank funding and credit risk-taking. Employing bank-firm-level data from the German credit registry during 2009:Q1-2014:Q4, we find that banks borrowing from the central bank rebalance their portfolios towards ex-ante riskier firms. We further establish that this effect is driven by the ECB’s maturity extensions and that the risk-taking sensitivity of banks borrowing from the ECB is independent of idiosyncratic bank characteristics. Finally, we show that these shifts in bank lending are associated with an increase in firm-level investment and employment, but also with a deterioration of bank balance sheet quality in the following year.