Stressed, Not Frozen: The Federal Funds Market in the Financial Crisis

53 Pages Posted: 11 Mar 2010 Last revised: 5 May 2011

See all articles by Gara Afonso

Gara Afonso

Federal Reserve Bank of New York

Anna Kovner

Federal Reserve Bank of New York

Antoinette Schoar

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: April 1, 2011

Abstract

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.

Keywords: Fed funds, financial crises, liquidity, interbank lending, hoarding

JEL Classification: G21, G01, D40, E40

Suggested Citation

Afonso, Gara and Kovner, Anna and Schoar, Antoinette, Stressed, Not Frozen: The Federal Funds Market in the Financial Crisis (April 1, 2011). Journal of Finance, Forthcoming; AFA 2011 Denver Meetings Paper; FRB of New York Staff Report No. 437. Available at SSRN: https://ssrn.com/abstract=1567648

Gara Afonso (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

HOME PAGE: http://nyfedeconomists.org/afonso

Anna Kovner

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Antoinette Schoar

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

50 Memorial Drive, E52-447
Cambridge, MA 02142
United States
617-253-3763 (Phone)
617-258-6855 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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