NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Tracing the Impact of Bank Liquidity Shocks: Evidence from an Emerging Market

Atif Mian, Asim Ijaz Khwaja

NBER Working Paper No. 12612
Issued in October 2006
NBER Program(s):   CF   ME   IFM

Do liquidity shocks matter? While even a simple `yes' or `no' presents identification challenges, going beyond this entails tracing how such shocks to lenders are passed on to borrowers, and whether borrowers can in turn cushion these shocks through the credit market. This paper does so by using data that follows all loans made by lenders to borrowing firms in Pakistan, and exploiting cross-bank variation in liquidity shocks induced by the unanticipated nuclear tests in 1998. We isolate the causal impact of the bank lending channel by showing that for the same firm borrowing from two different banks, its loan from the bank experiencing a 1% larger decline in liquidity drops by an additional 0.6%. The liquidity shock also lowers the probability of continued lending to old clients and extending credit to new ones. Although this lending channel affects all firms significantly, large firms and those with strong business and political ties completely compensate the effect by borrowing more from more liquid banks - both through existing and new banking relationships. In contrast, small unconnected firms are entirely unable to hedge and face large drops in overall borrowing and increased financial distress. The liquidity shocks thus have large distributional consequences.

download in pdf format
   (385 K)

email paper

This paper is available as PDF (385 K) or via email.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w12612

Published: Asim Ijaz Khwaja & Atif Mian, 2008. "Tracing the Impact of Bank Liquidity Shocks: Evidence from an Emerging Market," American Economic Review, American Economic Association, vol. 98(4), pages 1413-42, September.

Users who downloaded this paper also downloaded these:
Calvo w15425 FINANCIAL CRISES AND LIQUIDITY SHOCKS: A Bank-Run Perspective
Diamond and Rajan w7430 Liquidity Risk, Liquidity Creation and Financial Fragility: A Theory of Banking
Acharya, Shin, and Yorulmazer w15567 Crisis Resolution and Bank Liquidity
Lahiri, Singh, and Vegh w12684 Optimal exchange rate regimes: Turning Mundell-Fleming's dictum on its head
Keller and Shiue w13913 Institutions, Technology, and Trade
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us