International financial integration, crises and monetary policy: evidence from the Euro area interbank crises

Abbassi, Puriya; Bräuning, Falk; Fecht, Falko; Peydró, José-Luis

International financial integration, crises and monetary policy: evidence from the Euro area interbank crises

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Published as ‘Cross-border interbank liquidity, crises, and monetary policy’ in Journal of International Economics, 139, November 2022, 103657. DOI: https://doi.org/10.1016/j.jinteco.2022.103657

Abstract

We analyze how the Lehman and sovereign crises affect international financial integration, exploiting euro-area proprietary interbank data, crisis and monetary shocks, and loan terms to the same borrower during the same day by domestic versus foreign lenders. Crisis shocks reduce the supply of cross-border liquidity, with stronger volume than pricing effects, thereby impairing international financial integration. On the extensive margin, the cross-border credit crunch is independent of quality, while on the intensive margin riskier borrower banks suffer more. Moreover, the cross-border liquidity crunch is substantially stronger for term loans, and weaker for foreign lender banks that have a subsidiary in the same country than the borrower. Nonstandard monetary policy improves interbank liquidity, but without fostering strong crossborder financial re-integration.