Download This PaperThe effects of two-way lending between financial conglomerates in bilateral repo markets
65 Pages Posted: 13 May 2019 Last revised: 9 Dec 2025
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The effects of two-way lending between financial conglomerates in bilateral repo markets
The Effects of Two-Way Lending between Financial Conglomerates in Bilateral Repo Markets
Date Written: December 06, 2024
Abstract
We examine how market structure, market power, and systemic risk respond to close and intense lending relationships between financial conglomerates (FCs) in non-centrally cleared bilateral repo markets. Using transaction-level data from Mexico, we document persistent and stable funding relationships between FC-affiliated banks and funds, characterized by two distinctive features: First, the funding transactions are two-way, meaning that a pair of rival FCs provide lending to each other on the same day. Second, two-way transactions are executed at lower average rates than one-way transactions. We show that two-way lending (TWL) between FCs contributes to increased market concentration and market power for FC-affiliated funds, while worsening the lending terms for independent banks and funds. Furthermore, we find that the bank-level contribution to systemic risk rises with increased TWL.
Keywords: Repo market, Financial conglomerates, Relationship lending, Competition, Concentration, Market power, Financial stability G1, G23, G28, L4, L22, Two-way lending
JEL Classification: G1, G23, G28, L4, L22.
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