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Identifying term interbank loans from Fedwire payments data

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  • Dennis Kuo
  • David Skeie
  • James Vickery
  • Thomas Youle

Abstract

Interbank markets for term maturities experienced great stress during the 2007-09 financial crisis, as illustrated by the behavior of one- and three-month Libor. Despite widespread interest in these markets, little data are available on dollar interbank lending for maturities beyond overnight. We develop a methodology to infer individual term dollar interbank loans (for maturities between two days and one year) by applying a set of filters to payments settled on the Fedwire Funds Service, the large-value bank payment system operated by the Federal Reserve Banks. Our approach introduces several innovations and refinements relative to previous research by Furfine (1999) and others that measures overnight interbank lending. Diagnostic tests to date suggest our approach provides a novel and useful source of information about the term interbank market, allowing for a number of research applications. Limitations of the algorithm and caveats on its use are discussed in detail. We also present stylized facts based on the algorithm's results, focusing on the 2007-09 period. At the crisis peak following the failure of Lehman Brothers in September 2008, we observe a sharp increase in the dispersion of inferred term interbank interest rates, a shortening of loan maturities, and a decline in term lending volume.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 603.

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Date of creation: 2013
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Handle: RePEc:fip:fednsr:603

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Keywords: Interbank market ; Fedwire ; Financial crises;

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References

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  1. Viral V. Acharya & David Skeie, 2011. "A model of liquidity hoarding and term premia in inter-bank markets," Staff Reports 498, Federal Reserve Bank of New York.
  2. Bech, Morten L. & Klee, Elizabeth, 2011. "The mechanics of a graceful exit: Interest on reserves and segmentation in the federal funds market," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 415-431.
  3. F.R. Liedorp & L. Medema & M. Koetter & R.H. Koning & I. van Lelyveld, 2010. "Peer monitoring or contagion? Interbank market exposure and bank risk," DNB Working Papers 248, Netherlands Central Bank, Research Department.
  4. Gara Afonso & Anna Kovner & Antoinette Schoar, 2011. "Stressed, Not Frozen: The Federal Funds Market in the Financial Crisis," Journal of Finance, American Finance Association, vol. 66(4), pages 1109-1139, 08.
  5. Paolo Angelini & Andrea Nobili & Cristina Picillo, 2011. "The Interbank Market after August 2007: What Has Changed, and Why?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(5), pages 923-958, 08.
  6. Furfine, Craig H, 2001. "Banks as Monitors of Other Banks: Evidence from the Overnight Federal Funds Market," The Journal of Business, University of Chicago Press, vol. 74(1), pages 33-57, January.
  7. Ben R. Craig & Goetz von Peter, 2010. "Interbank tiering and money center banks," Working Paper 1014, Federal Reserve Bank of Cleveland.
  8. Todd Keister & James J. McAndrews, 2009. "Why are banks holding so many excess reserves?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 15(Dec).
  9. Acharya, Viral V & Schnabl, Philipp & Suarez, Gustavo, 2012. "Securitization Without Risk Transfer," CEPR Discussion Papers 8769, C.E.P.R. Discussion Papers.
  10. Olivier Armantier & Adam Copeland, 2012. "Assessing the quality of “Furfine-based” algorithms," Staff Reports 575, Federal Reserve Bank of New York.
  11. Adam Copeland & Antoine Martin & Michael Walker, 2010. "The tri-party repo market before the 2010 reforms," Staff Reports 477, Federal Reserve Bank of New York.
  12. Darrell Duffie & David Skeie & James Vickery, 2013. "A sampling-window approach to transactions-based Libor fixing," Staff Reports 596, Federal Reserve Bank of New York.
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Cited by:
  1. Acharya, Viral V & Skeie, David, 2011. "A Model of Liquidity Hoarding and Term Premia in Inter-Bank Markets," CEPR Discussion Papers 8705, C.E.P.R. Discussion Papers.
  2. Robert A. Ritz & Ansgar Walther, 2014. "How do banks respond to increased funding uncertainty?," Cambridge Working Papers in Economics 1414, Faculty of Economics, University of Cambridge.

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