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Federal Reserve Bank of New York
Staff Reports
Stressed, not frozen: the Federal Funds market in the financial crisis
Gara Afonso
Anna Kovner
Antoinette Schoar

We examine the importance of liquidity hoarding and counterparty risk in the U.S. overnight interbank market during the financial crisis of 2008. Our findings suggest that counterparty risk plays a larger role than does liquidity hoarding: the day after Lehman Brothers’ bankruptcy, loan terms become more sensitive to borrower characteristics. In particular, poorly performing large banks see an increase in spreads of 25 basis points, but are borrowing 1 percent less, on average. Worse performing banks do not hoard liquidity. While the interbank market does not freeze entirely, it does not seem to expand to meet latent demand.

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Gara Afonso & Anna Kovner & Antoinette Schoar, Stressed, not frozen: the Federal Funds market in the financial crisis, Federal Reserve Bank of New York, Staff Reports 437, 01 Mar 2010, revised 01 May 2011.
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Note: For a published version of this report, see Gara Afonso, Anna Kovner, and Antoinette Schoar, "Stressed, Not Frozen: The Federal Funds Market in the Financial Crisis," Journal of Finance 66, no. 4 (August 2011): 1109-39.
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Keywords: fed funds; financial crisis; liquidity; interbank lending; hoarding
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