The Effect of Contingent Credit Lines on Banks' Liquidity Demand

I analyze the effect of contingent credit lines on bank's liquidity demand in Argentina. These lines provide insurance to systemic risk by enhancing the Central Bank's ability to act as a lender of last resort in the event of a crisis. Theory predicts that commercial banks with limited access to international capital markets should reduce their holdings of liquid assets after the announcement of the contingent credit lines. This prediction is tested by means of a difference-in-differences regression, with domestic banks as the treatment group and foreign-owned banks as the control group. The results show that domestic banks significantly reduced their liquidity holdings, the adjustment taking place in two quarters