An Anatomy of a Sudden Stop and the Credit Supply Channel

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Title:

An Anatomy of a Sudden Stop and the Credit Supply Channel

Number:

18/18

Author(s):

Salih Fendoğlu, Steven Ongena

Language:

English

Date:

November 2018

Abstract:

How does a sudden stop affect the local supply of credit by domestic banks? To answer this question, we study the Turkish credit register around Lehman. We find that the credit supply channel during a sudden stop works through not only banks’ ex-ante level of reliance on foreign funding (as is often documented in extant research), but also the difficulty of banks in rolling over their maturing foreign debt (which we capture by remaining maturity of and premium on their foreign funding), and for banks with ex-ante more optimistic exchange rate expectations, their holding of ex-ante riskier loan portfolios. Our research thereby uncovers the latter two channels as a significant source of amplification in contracting credit supply during a sudden stop.

Keywords:

Sudden stop, Credit supply channel, Emerging market economies

JEL Codes:

E44; F34; F41

An Anatomy of a Sudden Stop and the Credit Supply Channel