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Relationship lending in the interbank market and the price of liquidity

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  • Bräuning, Falk
  • Fecht, Falko

Abstract

This paper empirically investigates the effect of interbank relationship lending on banks' access to liquidity. Our analysis is based on German interbank payment data which we use to create a panel of unsecured overnight loans between 1079 distinct borrower-lender pairs. The data shows that banks rely on repeated interactions with the same counterparties to trade liquidity. For the price of liquidity, we find that in the run-up to the recent financial crisis of 2007/08 relationship lenders charged already higher interest rates to their borrowers after controlling for other bank specific characteristics and general market conditions. By contrast, during the crisis borrowers paid on average lower rates to their relationship lenders compared to spot lenders. The observed interest rate differences are statistically and economically significant and in line with theory that relationship lenders have private information about the creditworthiness of their close borrowers. --

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Bibliographic Info

Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Papers with number 22/2012.

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Date of creation: 2012
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Handle: RePEc:zbw:bubdps:222012

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Keywords: Interbank Market; Relationship Lending; Liquidity Crisis; Central Counterpart; Financial Contagion;

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References

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  1. Bhattacharya, Sudipto & Fulghieri, Paolo, 1994. "Uncertain liquidity and interbank contracting," Economics Letters, Elsevier, Elsevier, vol. 44(3), pages 287-294.
  2. Allen N. Berger & Christa H. S. Bouwman, 2009. "Bank Liquidity Creation," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 22(9), pages 3779-3837, September.
  3. Xavier Freixas & José Jorge, 2007. "The role of interbank markets in monetary policy: A model with rationing," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 1027, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2008.
  4. Degryse, H.A. & Ongena, S., 2002. "Distance, Lending Relationships and Competition," Discussion Paper, Tilburg University, Center for Economic Research 2002-16, Tilburg University, Center for Economic Research.
  5. Bech, Morten L. & Atalay, Enghin, 2008. "The topology of the federal funds market," Working Paper Series, European Central Bank 0986, European Central Bank.
  6. Xavier Freixas & Cornelia Holthausen, 2001. "Interbank market integration under asymmetric information," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 579, Department of Economics and Business, Universitat Pompeu Fabra.
  7. Darrell Duffie & Nicolae Garleanu & Lasse Heje Pedersen, 2004. "Over-the-Counter Markets," NBER Working Papers 10816, National Bureau of Economic Research, Inc.
  8. Fecht, Falko & Grüner, Hans Peter & Hartmann, Philipp, 2012. "Financial integration, specialization, and systemic risk," Journal of International Economics, Elsevier, Elsevier, vol. 88(1), pages 150-161.
  9. Fecht, Falko & Nyborg, Kjell G. & Rocholl, Jörg, 2008. "Liquidity management and overnight rate calendar effects: Evidence from German banks," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 19(1), pages 7-21, March.
  10. Xavier Freixas & Bruno M. Parigi & Jean-Charles Rochet, 2000. "Systemic risk, interbank relations, and liquidity provision by the central bank," Proceedings, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, pages 611-640.
  11. Fecht, Falko & Nyborg, Kjell G. & Rocholl, Jörg, 2011. "The price of liquidity: The effects of market conditions and bank characteristics," Journal of Financial Economics, Elsevier, Elsevier, vol. 102(2), pages 344-362.
  12. Adam B. Ashcraft & Darrell Duffie, 2007. "Systemic Illiquidity in the Federal Funds Market," American Economic Review, American Economic Association, American Economic Association, vol. 97(2), pages 221-225, May.
  13. Broecker, Thorsten, 1990. "Credit-Worthiness Tests and Interbank Competition," Econometrica, Econometric Society, Econometric Society, vol. 58(2), pages 429-52, March.
  14. Harald Hau & Marcel Thum, 2009. "Subprime Crisis and Board (In-)Competence: Private vs. Public Banks in Germany," CESifo Working Paper Series 2640, CESifo Group Munich.
  15. Flannery, Mark J, 1996. "Financial Crises, Payment System Problems, and Discount Window Lending," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 28(4), pages 804-24, November.
  16. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  17. Cocco, João F. & Gomes, Francisco J. & Martins, Nuno C., 2009. "Lending relationships in the interbank market," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 18(1), pages 24-48, January.
  18. Ana Babus, 2011. "Strategic Relationships in Over-the-Counter Markets," 2011 Meeting Papers 1405, Society for Economic Dynamics.
  19. Gara Afonso & Anna Kovner & Antoinette Schoar, 2011. "Stressed, Not Frozen: The Federal Funds Market in the Financial Crisis," Journal of Finance, American Finance Association, American Finance Association, vol. 66(4), pages 1109-1139, 08.
  20. Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 9(1), pages 7-25, January.
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Citations

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Cited by:
  1. Craig, Ben R. & Fecht, Falko & Tümer-Alkan, Günseli, 2013. "The role of interbank relationships and liquidity needs," Discussion Papers 54/2013, Deutsche Bundesbank, Research Centre.
  2. Aldasoro, Iñaki & Angeloni, Ignazio, 2013. "Input-output-based measures of systemic importance," SAFE Working Paper Series 29, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
  3. Tölö , Eero & Jokivuolle, Esa & Viren, Matti, 2014. "Do private signals of a bank’s creditworthiness predict the bank’s CDS price? Evidence from the Eurosystem's overnight loan rates," Research Discussion Papers, Bank of Finland 9/2014, Bank of Finland.
  4. Bucher, Monika & Hauck, Achim & Neyer, Ulrike, 2014. "Frictions in the interbank market and uncertain liquidity needs: Implications for monetary policy implementation," DICE Discussion Papers 134, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).

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