International financial integration, crises and monetary policy: evidence from the Euro area interbank crises

Abstract

We analyze how international financial integration is affected by the recent financial and sovereign crises, exploiting euro-area proprietary interbank data, crisis and monetary shocks, and loan terms to the same borrower during the same day by domestic versus foreign lenders. Crisis shocks reduce the supply of cross-border liquidity, with stronger volume than pricing effects, thereby impairing international financial integration. On the extensive margin, the cross-border credit crunch is independently of quality. On the intensive margin, however, GIPSheadquartered debtor banks suffer in the Lehman crisis, but effects are stronger in the sovereign-debt crisis, especially for riskier banks. Consistent with asymmetric information being the key driver, the cross-border liquidity crunch is stronger for longer-term loans, and weaker for foreign lender banks that are located in the same country than the borrower. Nonstandard monetary policy improves interbank liquidity, but without fostering strong cross-border financial reintegration.