to these variables. In the case of the uncertainty measure, this result sheds light on the question of whether risk aversion itself changed during the crisis, or whether market participants, facing a shock to uncertainty and risk, took actions to reduce their risk exposure; our results support the latter of these two competing views.

Finally, the coefficients of some of the control variables appear to be consistent with _a priori_ theory. Bank lending to developing countries is greater for larger economies, and smaller for economies with higher inflation rates, perhaps due to greater _ex ante_ uncertainty of real returns on loans, or because inflation proxies for a less favorable policy environment more broadly.<sup>15</sup> There does not appear to be a significant association of lending with growth, nor with loan demand from high income markets (as proxied by demand for loans faced by U.S. banks<sup>16</sup> ).

# **4.2 Robustness of the benchmark**

The results are generally robust to alternative measures of the three channels, as shown in Table 2. In column ( _R1_ ), the Libor-CD spread is substituted for Libor-OIS as a measure of interbank liquidity; ( _R2_ ) includes both Libor-CD and Libor-OIS. In ( _R3_ ), loss allowances as a fraction of outstanding loans substitute for CDS as a measure of bank balance sheet problems. In ( _R4_ ), the index of conditional volatility of asset prices used to capture the uncertainty channel in the benchmark is replaced with an index of the unconditional standard deviations of the same set of asset prices. In ( _R5_ ), the volatility measure is replaced with measure of changes in risk aversion of bankers; in ( _R6_ ), both this risk aversion measure and the volatility measure are included. In ( _R7_ ), growth and inflation are measured on a quarter-on-quarter basis instead of year-on-year. Specification ( _R8_ ) adds depreciation of the local currency against the U.S. dollar to the set of control variables.

As discussed in Section 3.1, the term “liquidity” can have more than one meaning. Since we are concerned with the availability of funding liquidity to banks, as opposed to the degree of liquidity of a market which is better captured by traditional measures such as the spread between on-the-run and off-the-run securities or the bid-ask spread, the Libor-OIS spread is our preferred measure. However, disentangling a pure liquidity component from a counterparty risk component is not straightforward, since availability of credit depends crucially on credit risk, and more than one approach is worth considering. One alternative measure in the literature has been the spread between Libor and the rate on CDs, since purchasers of CDs do not necessarily face the liquidity constraints that banks do during a financial crisis (Taylor & Williams 2009). Furthermore, since CDs are typically only insured up to a limit, CD rates may rise along with

> 15 We use quarter-on-quarter (QoQ) inflation and growth data to better capture sharp, short-run changes that may be important during a crisis, as well as for consistency with the overall frequency of the dataset. However, QoQ data for inflation may result in extreme outliers, which we ameliorate by taking logarithms. Dropping these cases would potentially bias the results, since we lose valuable information from those observations. In any case, the results reported here remain robust to either artificially limiting the inflation rate in these cases to 1,000 percent, or dropping these observations entirely.

> 16The measure of loan demand is from the Fed’s Senior Loan Officer Survey. The ECB collects comparable data on loan demand faced by European banks, but we use the U.S. measure since U.S. banks lend less in developing countries.

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