Trading Partners in the Interbank Lending Mark

49 Pages Posted: 19 Mar 2012

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 15, 2012

Abstract

We examine the relevance of search costs and the transmission of liquidity shocks in the US overnight interbank market. There is large and persistent heterogeneity in how banks transact in this market: while some banks mainly rely on spot transactions, most form stable relationships with at least one lending counterparty. Our results suggest that borrowers pay lower prices and borrow more from their concentrated lenders. To assess the importance of search frictions and bargaining power, we exploit idiosyncratic demand shocks and exogenous supply shocks. On days when banks have higher idiosyncratic demand for funds, they borrow more from their most concentrated lenders but pay slightly higher interest rates on these days. While idiosyncratic demand shocks are not transmitted to the rest of the market (there is no impact on the market wide interest rate or liquidity), concentrated lenders do take advantage of increased market power. In contrast, exogenous shocks to the supply of liquidity, as proxied for by days with low government sponsored enterprise lending, lead to a market wide drop in liquidity and a rise in interest rates. However, borrowers with more concentrated trading partners are able to insulate themselves almost completely from the shock.

Keywords: interbank lending, OTC markets, fed funds

JEL Classification: G21, G10, D40, E59

Suggested Citation

Afonso, Gara and Kovner, Anna and Schoar, Antoinette, Trading Partners in the Interbank Lending Mark (March 15, 2012). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2024409 or http://dx.doi.org/10.2139/ssrn.2024409

Gara Afonso

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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

Anna Kovner (Contact Author)

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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