Reciprocal Lending Relationships Between Financial Conglomerates: Evidence from the Mexican Repo Market

Abstract

This paper examines the reciprocal lending (RL) relationships between financial conglomerates
(FCs) in the repo market. Using transaction-level data from Mexico, we find that the main economic
force behind RL relationships is related to the possibility to build deep and intense mutual lending
relationships in the repo market and execute them at lower rates. Further, we find that RL favors
market concentration of the repo lending in a few funds and increases FC-affiliated fund market
power. Finally, a deep reciprocal relationship between FCs lowers systemic risk and also decreases
the bank-level contribution to it. However, when funds depend more on a single bank to position
their excess liquidity, systemic risk increases.

Keywords: reciprocal lending, collateralized money market, banks, asset managers, competition policy, financial stability

JEL Classification: G01, G11, G21, G23, G28, L16, L22, L4