A Price-Differentiation Model of the Interbank Market and its Application to a Financial Crisis
Posted: 9 Mar 2017
Date Written: December 12, 2016
In an overnight interbank loan market, interest rate curves between bank pairs, as functions of loan values, can be used to infer individual banks' implicit valuation of reserve holdings. Such information can help interpret shifts in rate curves between bank pairs, for example, in response to a financial crisis. This paper proposes a tractable model generating a rate curve for trades between a large monopolistic bank and a small bank. Observed rate curves can be related to implicit marginal values through a calibration procedure proposed in this paper. This is applied to a unique dataset of overnight unsecured interbank loans in Mexico around the 2008 financial crisis. This paper finds that at the height of the crisis, smaller banks were trading with large banks at worse rates than usual, and suggests that a broad decline in valuation of reserve holdings across small banks is primarily responsible for this outcome.
Keywords: Interbank Market, Financial Crisis
JEL Classification: E50, G21
Suggested Citation: Suggested Citation