The Cost of Collateralized Borrowing in the Colombian Money Market: Does Connectedness Matter?

Abstract

Under the view that the market is a weighted and directed network, we model the Colombian money market within a spatial econometrics framework. By estimating two standard spatial econometric models, we study the cost of collateralized borrowing (i.e. sell/buy backs) among Colombian financial institutions, and its relationship with traditional determinants (leverage, size and borrowing levels), and with the observed linkages among financial institutions (spatial variables). Our main findings indicate that (i) leverage, size and borrowing levels are of low explanatory power by themselves; (ii) the cost of collateralized borrowing significantly depends on how financial institutions are connected; (iii) borrowing spreads are explained by spatial effects of traditional factors; (iv) direct and spill-over effects from the spatially lagged value of financial leverage most significantly determine the cost of collateralized borrowing. Our results emphasize the importance of connectedness among financial institutions, and are essential in the context of a macro-prudential perspective of financial stability.

Keywords: money market, interbank, collateral, collateralized borrowing, spatial econometrics

JEL Classification: C31, G21, G32