What are the real effects of financial market liquidity?

Auteurs

• Andreas R. Dombret

Paramètres

• Affaires et économie

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This analysis examines the influence of market liquidity on bank lending in the euro area from 2003 to 2016. Findings indicate a positive correlation between market liquidity and loan volumes, while credit spreads are negatively affected. During the 2007-09 financial crisis and the subsequent European debt crisis, lending decreased, with banks demanding higher credit spreads. Notably, the impact of reduced liquidity on bank lending is more pronounced than the benefits of increased liquidity, particularly affecting corporate loans, where lending conditions tighten first in times of low market liquidity. Bank-level data further supports the significant role of market liquidity in lending practices. Specifically, non-listed banks, those with lower profitability, banks that depend more on net interest income, and banks with high funding liquidity are particularly vulnerable to fluctuations in market liquidity. Thus, maintaining well-functioning and sufficiently liquid markets is crucial to prevent adverse effects on bank lending that could hinder the real economy. This is especially relevant in light of the proposed capital markets union in the EU and the potential implications of the United Kingdom's exit from the EU.

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• Année de publication: 2018