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Lending Relationships in the Interbank Market

38 Pages Posted: 4 Feb 2005  

Joao F. Cocco

London Business School; Centre for Economic Policy Research (CEPR)

Francisco Gomes

London Business School

Nuno C. Martins

Bank of Portugal; Universidade Nova de Lisboa

Date Written: February 2003

Abstract

This paper is an empirical study of lending relationships among banks in the interbank market. We use a unique data set to construct a dynamic measure of relationships, namely the intensity of trading volume between the lender and borrower, as a percentage of their trading volume with all market participants, in the recent past. We find that relationships allow market participants to obtain insurance against a shortage of funds during the reserve maintenance period. We also find evidence that relationships tend to be established between banks whose liquidity shocks are less correlated, for whom the gains from the relationship are also larger. These results support the view that relationships play an important role in promoting stability of the Interbank Market.

Suggested Citation

Cocco, Joao F. and Gomes, Francisco and Martins, Nuno C., Lending Relationships in the Interbank Market (February 2003). AFA 2004 San Diego Meetings. Available at SSRN: https://ssrn.com/abstract=568704 or http://dx.doi.org/10.2139/ssrn.568704

João F. Cocco (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
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+020 7724-3317 (Fax)

Centre for Economic Policy Research (CEPR)

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London, EC1V 3PZ
United Kingdom

Francisco Gomes

London Business School ( email )

Institute of Finance and Accounting
Sussex Place - Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 (Phone)
+44 20 7724 3317 (Fax)

HOME PAGE: http://www.london.edu/faculty/fgomes

Nuno C. Martins

Bank of Portugal ( email )

Avenida Almirante Reis 71
Lisbon 1150-012
Portugal
(351) 213130938 (Phone)

Universidade Nova de Lisboa

Lisbon
Portugal

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