What Drives Interbank Loans? Evidence from Canada
47 Pages Posted: 6 Jun 2017 Last revised: 14 Jul 2018
Date Written: June 26, 2018
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: Suggested Citation