Search Results
Working Paper
Relationship lending in the interbank market and the price of liquidity
We empirically investigate the effect that relationship lending has on the availability and pricing of interbank liquidity. Our analysis is based on a daily panel of unsecured overnight loans between 1,079 distinct German bank pairs from March 2006 to November 2007, a period that includes the 2007 liquidity crisis that marked the beginning of the 2007/08 global financial crisis. We find that (i) relationship lenders are more likely to provide liquidity to their closest borrowers, (ii) particularly opaque borrowers obtain liquidity at lower rates when borrowing from their relationship lenders, ...
Working Paper
Interconnectedness in the Interbank Market
We study the behavior of the interbank market before, during and after the 2008 financial crisis. Leveraging recent advances in network analysis, we study two network structures, a correlation network based on publicly traded bank returns, and a physical network based on interbank lending transactions. While the two networks behave similarly pre-crisis, during the crisis the correlation network shows an increase in interconnectedness while the physical network highlights a marked decrease in interconnectedness. Moreover, these networks respond differently to monetary and macroeconomic shocks. ...
Report
Identifying term interbank loans from Fedwire payments data
Interbank markets for term maturities experienced great stress during the 2007-09 financial crisis, as illustrated by the behavior of the one- and three-month Libor. Despite widespread interest in these markets, little data is available on dollar interbank lending for maturities beyond overnight. We develop a methodology to infer information about individual term dollar interbank loans settled through the Fedwire Funds Service, the large-value bank payment system operated by the Federal Reserve Banks. We find a sharp increase in the dispersion of inferred term interbank interest rates, a ...
Working Paper
The Role of Interbank Relationships and Liquidity Needs
In this paper, we focus on the interconnectedness of banks and the price they pay for liquidity. We assess how the concentration of credit relationships and the position of a bank in the network topology of the system influence the bank?s ability to meet its liquidity demand. We use quarterly data of bilateral interbank credit exposures between all German banks from 2000 to 2008 to measure interbank relationships and the network characteristics. We match these data with the bids placed by the individual banks in the European Central Bank?s (ECB) weekly repo auctions. The bids measure each ...
Working Paper
Bad Sovereign or Bad Balance Sheets? Euro Interbank Market Fragmentation and Monetary Policy, 2011-2015
We measure the relative role of sovereign-dependence risk and balance sheet (credit) risk in euro area interbank market fragmentation from 2011 to 2015. We combine bank-to-bank loan data with detailed supervisory information on banks? cross-border and cross-sector exposures. We study the impact of the credit risk on banks? balance sheets on their access to, and the price paid for, interbank liquidity, controlling for sovereign-dependence risk and lenders? liquidity shocks. We find that (i) high non-performing loan ratios on the GIIPS portfolio hinder banks? access to the interbank market ...
Working Paper
Collective Moral Hazard and the Interbank Market
The concentration of risk within financial system is considered to be a source of systemic instability. We propose a theory to explain the structure of the financial system and show how it alters the risk taking incentives of financial institutions. We build a model of portfolio choice and endogenous contracts in which the government optimally intervenes during crises. By issuing financial claims to other institutions, relatively risky institutions endogenously become large and interconnected. This structure enables institutions to share the risk of systemic crisis in a privately optimal way, ...
Report
What determines the composition of international bank flows?
Several recent studies document that the extent to which banks transmit shocks across borders depends on the type of foreign activities these banks engage in. This paper proposes a model to explain the composition of banks? foreign activities, distinguishing between international interbank lending, intrabank lending, and cross-border lending to foreign firms. The model shows that the different activities are jointly determined and depend on the efficiencies of countries? banking sectors, differences in the return on loans across countries, and impediments to foreign bank operations. ...
Discussion Paper
Reallocating Liquidity to Resolve a Crisis
Shortly after the collapse of Silicon Valley Bank (SVB) in March 2023, a consortium of eleven large U.S. financial institutions deposited $30 billion into First Republic Bank to bolster its liquidity and assuage panic among uninsured depositors. In the end, however, First Republic Bank did not survive, raising the question of whether a reallocation of liquidity among financial institutions can ever reduce the need for central bank balance sheet expansion in the fight against bank runs. We explore this question in this post, based on a recent working paper.
Working Paper
Wholesale Banking and Bank Runs in Macroeconomic Modeling of Financial Crises
There has been considerable progress in developing macroeconomic models of banking crises. However, most of this literature focuses on the retail sector where banks obtain deposits from households. In fact, the recent financial crisis that triggered the Great Recession featured a disruption of wholesale funding markets, where banks lend to one another. Accordingly, to understand the financial crisis as well as to draw policy implications, it is essential to capture the role of wholesale banking. The objective of this paper is to characterize a model that can be seen as a natural extension of ...
Report
An empirical study of trade dynamics in the interbank market
We use minute-by-minute daily transaction-level payments data to document the cross-sectional and time-series behavior of the estimated prices and quantities negotiated by commercial banks in the fed funds market. We study the frequency and volume of trade, the size distribution of loans, the distribution of bilateral fed funds rates, and the intraday dynamics of the reserve balances held by commercial banks. We find evidence of the importance of the liquidity provision achieved by commercial banks that act as de facto intermediaries of fed funds.