Trading Partners in the Interbank Lending Market

Afonso, Gara; Kovner, Anna; Schoar, Antoinette

doi:10.2139/ssrn.2266527

Trading Partners in the Interbank Lending Market

FRB of New York Staff Report No. 620

52 Pages Posted: 19 May 2013

See all articles by Gara Afonso

Antoinette Schoar

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

Date Written: May 1, 2013

Abstract

There is substantial heterogeneity in the structure of trading relationships in the U.S. overnight interbank lending market: Some banks rely on spot transactions, while most form stable, concentrated borrowing relationships to hedge liquidity needs. As a result, borrowers pay lower prices and borrow more from their concentrated lenders. Exogenous shocks to liquidity supply (days with low GSE lending) lead to marketwide drops in liquidity and a rise in interest rates. However, borrowers with concentrated lenders are almost completely insulated from the shocks, while liquidity transmission affects the rest of the market via higher interest rates and reduced borrowing volumes.

Keywords: interbank lending, OTC markets

JEL Classification: D40, E59, G10, G21

Suggested Citation: Suggested Citation

Afonso, Gara and Kovner, Anna and Schoar, Antoinette, Trading Partners in the Interbank Lending Market (May 1, 2013). FRB of New York Staff Report No. 620. Available at SSRN: https://ssrn.com/abstract=2266527 or http://dx.doi.org/10.2139/ssrn.2266527