Efficiency and Bargaining Power in the Interbank Loan Market

26 Pages Posted: 29 Apr 2016

See all articles by Jason Allen

Jason Allen

Government of Canada - Bank of Canada

James T. E. Chapman

Government of Canada - Bank of Canada

Federico Echenique

California Institute of Technology - Division of the Humanities and Social Sciences

Matthew Shum

California Institute of Technology

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Date Written: May 2016

Abstract

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 although 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 2007–8 financial crisis. We find that bargaining power tilted sharply toward borrowers as the financial crisis progressed and (surprisingly) toward riskier borrowers.

Suggested Citation

Allen, Jason J. and Chapman, James T. E. and Echenique, Federico and Shum, Matthew, Efficiency and Bargaining Power in the Interbank Loan Market (May 2016). International Economic Review, Vol. 57, Issue 2, pp. 691-716, 2016, Available at SSRN: https://ssrn.com/abstract=2772301 or http://dx.doi.org/10.1111/iere.12173

Jason J. Allen (Contact Author)

Government of Canada - Bank of Canada ( email )

Ottawa, Ontario K1A 0G9
Canada

James T. E. Chapman

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Federico Echenique

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

313 Baxter Hall
Pasadena, CA 91125
United States

Matthew Shum

California Institute of Technology ( email )

Pasadena, CA 91125
United States

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