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The role of bank relationships in the interbank market

Author

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  • Temizsoy, Asena
  • Iori, Giulia
  • Montes-Rojas, Gabriel

Abstract

This paper empirically explores the effect of bank lending relationships in the interbank market. We use data from the e-MID market that represents the only transparent electronic platform in Europe and USA, unaffected by search costs and other fictions. We show that stable relationships exist and that they played a significant role during the 2007–2008 financial crisis. Trading with preferred counterparts is associated with more favorable rates for both lenders and borrowers, and carries larger trading volumes. The results point to a peer monitoring role of relationship lending, which contributes, at a time of financial distress, to a smooth liquidity redistribution among banks. Relationship lending thus plays an important positive role for financial stability.

Suggested Citation

  • Temizsoy, Asena & Iori, Giulia & Montes-Rojas, Gabriel, 2015. "The role of bank relationships in the interbank market," Journal of Economic Dynamics and Control, Elsevier, vol. 59(C), pages 118-141.
  • Handle: RePEc:eee:dyncon:v:59:y:2015:i:c:p:118-141
    DOI: 10.1016/j.jedc.2015.07.008
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    References listed on IDEAS

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    1. Angelini, Paolo, 2000. "Are Banks Risk Averse? Intraday Timing of Operations in the Interbank Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(1), pages 54-73, February.
    2. Affinito, Massimiliano, 2012. "Do interbank customer relationships exist? And how did they function in the crisis? Learning from Italy," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3163-3184.
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    4. Vasilis Hatzopoulos & Giulia Iori & Rosario N. Mantegna & Salvatore Miccichè & Michele Tumminello, 2015. "Quantifying preferential trading in the e-MID interbank market," Quantitative Finance, Taylor & Francis Journals, vol. 15(4), pages 693-710, April.
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    Citations

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    Cited by:

    1. repec:spr:comgts:v:15:y:2018:i:1:d:10.1007_s10287-017-0293-6 is not listed on IDEAS
    2. Leon Rincon, C.E. & Sarmiento, M., 2016. "Liquidity and Counterparty Risks Tradeoff in Money Market Networks," Discussion Paper 2016-017, Tilburg University, Center for Economic Research.
    3. repec:eee:jbfina:v:97:y:2018:i:c:p:20-36 is not listed on IDEAS
    4. Silva, Thiago Christiano & da Silva, Michel Alexandre & Tabak, Benjamin Miranda, 2017. "Systemic risk in financial systems: A feedback approach," Journal of Economic Behavior & Organization, Elsevier, vol. 144(C), pages 97-120.
    5. Kobayashi, Teruyoshi & Takaguchi, Taro, 2018. "Identifying relationship lending in the interbank market: A network approach," Journal of Banking & Finance, Elsevier, vol. 97(C), pages 20-36.
    6. Tao Xu & Jianmin He & Shouwei Li, 2016. "Multi-Channel Contagion In Dynamic Interbank Market Network," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 19(06n07), pages 1-25, September.
    7. repec:eee:finsta:v:33:y:2017:i:c:p:346-365 is not listed on IDEAS
    8. Berardi, Simone & Tedeschi, Gabriele, 2017. "From banks' strategies to financial (in)stability," International Review of Economics & Finance, Elsevier, vol. 47(C), pages 255-272.
    9. Paolo Barucca & Fabrizio Lillo, 2015. "The organization of the interbank network and how ECB unconventional measures affected the e-MID overnight market," Papers 1511.08068, arXiv.org, revised Sep 2017.
    10. Temizsoy, Asena & Iori, Giulia & Montes-Rojas, Gabriel, 2017. "Network centrality and funding rates in the e-MID interbank market," Journal of Financial Stability, Elsevier, vol. 33(C), pages 346-365.
    11. Yuri Biondi & Feng Zhou, 2019. "Interbank credit and the money manufacturing process: a systemic perspective on financial stability," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 14(3), pages 437-468, September.

    More about this item

    Keywords

    Interbank market; Lending relationship; Overnight loans;

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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