Stressed Not Frozen: The Fed Funds Market in the Financial Crisis

60 Pages Posted: 15 Mar 2010 Last revised: 10 Sep 2010

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: March 2010

Abstract

This paper examines the impact of the financial crisis of 2008 on the federal funds market, specifically the bankruptcy of Lehman Brothers. Rather than a complete collapse of lending in the presence of a market wide shock, we see that banks become more restrictive in which counterparties they lend to. After Lehman Brothers, we find that amounts and spreads become more sensitive to borrower bank characteristics. While the market does not contract dramatically, lending rates increase. Further, the market does not seem to expand to meet the increased demand predicted by the drop in other bank funding markets. We examine discount window borrowing as a proxy for unmet fed funds demand and find that the fed funds market is not indiscriminate. As expected, borrowers who access the discount window have lower ROA. When looking at the lender side we do not find that the characteristics of the lending bank importantly affect the amount of interbank loans a bank makes. In particular, we do not find that worse performing banks start hoarding liquidity and indiscriminately reduce their lending.

Suggested Citation

Afonso, Gara and Kovner, Anna and Schoar, Antoinette, Stressed Not Frozen: The Fed Funds Market in the Financial Crisis (March 2010). NBER Working Paper No. w15806. Available at SSRN: https://ssrn.com/abstract=1569225

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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