Asymmetric transmission of a bank liquidity shock

• We use an exogenous shock that redistributes liquidity across Brazilian banks in late 2008.
• Ideal setting for investigation: some banks suffer withdrawals, others receive deposits.
• Asymmetric effect: withdrawals decrease loans, excess deposits do not increase loan supply.
• Results at both the extensive (number of borrowers), and the intensive (amount of loans) margin.
• SMEs suffer more loan shortage at the extensive margin.

We investigate whether banks that receive a positive liquidity shock make up for the reduction in the amount of credit supplied by banks that suffer a negative liquidity shock. For identification, we use the exogenous shock to the Brazilian banking system caused by the international turmoil of 2008 that sparked a run on small and medium banks toward systemically important banks. We find that a reduction in liquidity causes banks to strongly decrease their loan supply, whereas a positive liquidity shock has a small (if any) effect on the loan supply. Our evidence shows that this asymmetric effect of liquidity on the loan supply occurs both at the intensive and the extensive margins. Our findings are consistent with the theories that predict that borrowers face switching costs and that banks tend to hold on to liquidity during periods of systemic uncertainty.