Mapping change in the federal funds market

Bech, Morten L.; Bergstrom, Carl T.; Garratt, Rod; Rosvall, Martin

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Mapping change in the federal funds market

Abstract: We use an information-theoretic approach to describe changes in lending relationships between federal funds market participants around the time of the Lehman Brothers failure. Unlike previous work that conducts maximum-likelihood estimation on undirected networks, our analysis distinguishes between borrowers and lenders and looks for broader lending relationships (multibank lending cycles) that extend beyond the immediate counterparties. We find that significant changes in lending patterns emerge following implementation of the Interest on Reserves policy by the Federal Reserve on October 9, 2008.

Keywords: Federal funds market (United States); Federal Reserve System; Bank loans; Financial crises;