TY  - JOUR
AU  - Mian,Atif
AU  - Khwaja,Asim Ijaz
TI  - Tracing the Impact of Bank Liquidity Shocks: Evidence from an Emerging Market
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12612
PY  - 2006
Y2  - October 2006
UR  - http://www.nber.org/papers/w12612
L1  - http://www.nber.org/papers/w12612.pdf
N1  - Author contact info:
Atif R. Mian
Princeton University
Bendheim Center For Finance
26 Prospect Avenue
Princeton, NJ 08540
E-Mail: atif@princeton.edu

Asim Ijaz Khwaja
Kennedy School of Government
Harvard University
79 JFK Street
Cambridge, MA 02138
Tel: 617/494-7790
Fax: 617/496-8753
E-Mail: asim_ijaz_khwaja@harvard.edu
M3  - presented at "SI 2005 Corporate Finance Workshop", August 1-2, 2005
AB  - 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.
ER  -