Efficiency and Bargaining Power in the Interbank Loan Market
41 Pages Posted: 25 Aug 2012 Last revised: 11 Feb 2015
Date Written: February 9, 2015
Using detailed transactions-level data on interbank loans, we examine the efficiency of an overnight interbank lending market, and the bargaining power of its participants. Our analysis relies on the equilibrium concept of the core, which imposes a set of no-arbitrage conditions on trades in the market. For Canada's Large-Value Transfer System, we show that while the market is fairly efficient, systemic inefficiency persists throughout our sample. The level of inefficiency matches distinct phases of both the Bank of Canada's operations as well as phases of the 2007-2008 financial crisis. We find that bargaining power tilted sharply towards borrowers as the financial crisis progressed, and (surprisingly) towards riskier borrowers.
Keywords: interbank markets, cooperative bargaining, financial institutions
JEL Classification: C71, G21, G28, E58
Suggested Citation: Suggested Citation