Bargaining Power and Outside Options in the Interbank Lending Market

46 Pages Posted: 5 Nov 2017

See all articles by Puriya Abbassi

Puriya Abbassi

Deutsche Bundesbank

Falk Bräuning

Federal Reserve Banks - Federal Reserve Bank of Boston

Niels Schulze

Deutsche Bundesbank - Financial Stability Department

Multiple version iconThere are 2 versions of this paper

Date Written: 2017

Abstract

We study the role of bargaining power and outside options for the pricing of over-the-counter interbank loans using a bilateral Nash bargaining model and test the model predictions with detailed transaction-level data from the euro-area interbank market. We find that lender banks with greater bargaining power over their borrowers charge higher interest rates, while the lack of alternative investment opportunities for lenders reduces bilateral interest rates. Moreover, we find that lenders that are not eligible to earn interest on excess reserves (IOER) lend funds below the IOER rate to borrowers with access to the IOER facility, which in turn put these funds in their reserve accounts to earn the spread. Our findings highlight that this persistent arbitrage opportunity is not a result of the mere lack of alternative outside options of some lenders, but it crucially depends on their limited bilateral bargaining power, leading to a persistent segmentation of prices in the euro interbank market. We examine the implications of these findings for the transmission of euro-area monetary policy.

Keywords: bargaining power, over-the-counter market, monetary policy, money market segmentation

JEL Classification: E4, E58, G21

Suggested Citation

Abbassi, Puriya and Bräuning, Falk and Schulze, Niels, Bargaining Power and Outside Options in the Interbank Lending Market (2017). Bundesbank Discussion Paper No. 31/2017, Available at SSRN: https://ssrn.com/abstract=3065181

Puriya Abbassi (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany
00496965993708 (Phone)

Falk Bräuning

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

Niels Schulze

Deutsche Bundesbank - Financial Stability Department ( email )

Wilhelm-Epstein-Str. 14
60431 Frankfurt am Main
Germany

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