What Drives Interbank Loans? Evidence from Canada

47 Pages Posted: 6 Jun 2017 Last revised: 14 Jul 2018

See all articles by Narayan Bulusu

Narayan Bulusu

Bank of Canada

Pierre Guerin

Government of Canada - Bank of Canada

Date Written: June 26, 2018

Abstract

We find that collateral reallocation costs are a significant driver of the dynamics of overnight interbank loans. The cost of negotiating and settling collateralized over-the-counter trades incentivizes the temporary use of unsecured loans to meet changes in short-term liquidity needs, as well as greater uptake of central bank overnight lending facilities. This friction also leads to repos adjusting gradually in response to persistent changes in liquidity demand.

Keywords: Interbank lending, funding liquidity, repurchase agreements (repos), collateral management

JEL Classification: C55, E43, G23

Suggested Citation

Bulusu, Narayan and Guerin, Pierre, What Drives Interbank Loans? Evidence from Canada (June 26, 2018). Paris December 2017 Finance Meeting EUROFIDAI - AFFI, Available at SSRN: https://ssrn.com/abstract=2980879 or http://dx.doi.org/10.2139/ssrn.2980879

Narayan Bulusu (Contact Author)

Bank of Canada ( email )

234 Wellington St.
Ottawa, Ontario K1A 0G9
Canada

Pierre Guerin

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

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