Interbank Liquidity Risk Transmission to Emerging Markets Amidst Financial Crises

Abstract

We construct synthetic spreads representing funding liquidity risk in BRICS economies and examine whether stress in the interbank and financial markets in the US spread to emerging markets during the Global Financial Crisis, European Sovereign Debt Crisis, and COVID-19 pandemic. We rely on a time-varying-parameter model with shrinkage priors on daily data of varied lengths and reach two conclusions: the stock market and corporate debt channels in BRICS economies are not risk transmitters, and (b) government debt (local and sovereign) channels are regular vectors of funding liquidity risk. Deeper analysis of the results’ temporal patterns shows key central banking decisions to precede or coincide with spillover attenuation, which, too, progressively waned with each crisis. In fact, with the understandable exception of China, spillover phenomenon is inert during the COVID-19 pandemic.