Call Money Interest Rate Determinants in Argentina

Interbank markets are crucial for the proper functioning of banking systems. The analysis of these markets has different dimensions: (i) the diversity of actors involved both from the demand and supply sides, (ii) the regulatory framework and (iii) the risks associated with financial operations. On the one hand, banks carry on the management of their short-term liquidity positions through this market. On the other hand, it is usually the main market where the monetary authority intervenes to carry out monetary policy. The implementation of monetary policy operates affecting banks’ liquidity positions; operations undertaken by central banks to fulfill their targets (open market operations, loans to financial institutions at different maturities, collaterals and haircuts, etc.) have their counterpart in debits or credits in accounts held by commercial banks at central banks. In Argentina, the interbank market consists of one segment where operations are guaranteed and another without collateral. The market for interbank shortterm unsecured loans (named call money market) is our object of study. However, since 2002 -when the Central Bank began to issue debt instruments and use them for open market operations- it has started to gain more dynamic an overnight repo market. This study analyzes the determinants of the interest rate on the market for unsecured overnight lending in Argentina focusing on the characteristics of the participants that are conducting operations there. Operations in the call market are conducted bilaterally. Each bank performs the risk assessment for every one of the counterparties and then opens a “folder” with the credit limit assigned. Clearing and settlement of these operations is done through the Central Bank’s real-time gross settlement system so they do not have “settlement” risk. However, as transactions arranged on the phone cannot be known by all operators, the market shows less transparency in comparison to an electronic trading system. Our database provides daily information for the call market on: (i) banks involved, and (ii) amount, currency, maturity, and interest rate and type of interest rate (fixed or variable) of the loan. We use overnight transactions granted at fixed interest rates in the domestic currency. Main conclusions state that the size of the bank is important in determining the interest rate to obtain or provide funds. Additionally, we find that both the bank’s ownership and concentration on the supply or demand side affect the cost of funds. On the other hand, when a bank is an MAE agent, and therefore can operate on the repo market, it is reflected in a lower interest rate. We show that some factors of the operation also affect the interest rate. First, there is a negative relationship between the interest rate and the amount of the operation. Secondly, the relationship among banks is relevant as the links established between two entities reduce the interest rate. Additionally, there are other factors with positive impact on the interbank market rate. Such is the case of repo interest rate fixed by the Central Bank or an extraordinary demand for funds, for example by the end of the year or holiday on Monday or Friday. Finally, episodes in which private sector deposits tend to be reduced significantly (defined as a daily fall greater to 0.2%) are reflected in an increase in the interest rate indicating a higher liquidity demand by banks.