Foreign Banks, Liquidity Shocks, and Credit Stability

We empirically assess the responses of banks in the United States to a regulatory change that influenced the distribution of funding in the banking system. Following the 2011 FDIC change in the assessment base, insured banks found wholesale funding more costly, while uninsured branches of foreign banks enjoyed cheaper access to wholesale liquidity. We use quarterly bank balance sheet data and syndicated loans to exploit a rich dataset with borrower and lender characteristics that identify banks' lending. We find that uninsured foreign banks, which faced a relatively positive shock, engaged in liquidity hoarding. Hence, they accumulated more reserves but extended fewer loans and later became more passive in the syndicated loan deals in which they participated. The results indicate that the broadly held view that foreign banks insulate the stability of credit creation in host economies from liquidity shocks should be qualified.