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What drives interbank loans? Evidence from Canada

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  • Bulusu, Narayan
  • Guérin, Pierre

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.

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  • Bulusu, Narayan & Guérin, Pierre, 2019. "What drives interbank loans? Evidence from Canada," Journal of Banking & Finance, Elsevier, vol. 106(C), pages 427-444.
    • Handle: RePEc:eee:jbfina:v:106:y:2019:i:c:p:427-444
    DOI: 10.1016/j.jbankfin.2019.07.016
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    2. Pablo S. Castro & Ajit Desai & Han Du & Rodney Garratt & Francisco Rivadeneyra, 2021. "Estimating Policy Functions in Payments Systems Using Reinforcement Learning," Staff Working Papers 21-7, Bank of Canada.

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    More about this item

    Keywords

    Interbank lending; Funding liquidity; Repurchase agreements (repos); Collateral management;
    All these keywords.

    JEL classification:

    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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