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Efficiency And Bargaining Power In The Interbank Loan Market

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Listed:
  • Jason Allen
  • James Chapman
  • Federico Echenique
  • Matthew Shum

Abstract

Using detailed transactions‐level data on interbank loans, we examine the efficiency of an overnight interbank lending market and the bargaining power of its participants. Our analysis relies on the equilibrium concept of the core, which imposes a set of no‐arbitrage conditions on trades in the market. For Canada's Large Value Transfer System, we show that although the market is fairly efficient, systemic inefficiency persists throughout our sample. The level of inefficiency matches distinct phases of both the Bank of Canada's operations as well as phases of the 2007–8 financial crisis. We find that bargaining power tilted sharply toward borrowers as the financial crisis progressed and (surprisingly) toward riskier borrowers.

Suggested Citation

  • Jason Allen & James Chapman & Federico Echenique & Matthew Shum, 2016. "Efficiency And Bargaining Power In The Interbank Loan Market," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57, pages 691-716, May.
  • Handle: RePEc:wly:iecrev:v:57:y:2016:i::p:691-716
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    File URL: http://hdl.handle.net/10.1111/iere.12173
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Kyungmin Kim, 2017. "A Price-Differentiation Model of the Interbank Market and Its Application to a Financial Crisis," Finance and Economics Discussion Series 2017-065, Board of Governors of the Federal Reserve System (U.S.).
    2. Silvio Schumacher, 2016. "Networks and lending conditions: Empirical evidence from the Swiss franc money markets," Working Papers 2016-12, Swiss National Bank.
    3. Li, Fuchun & Perez-Saiz, Hector, 2018. "Measuring systemic risk across financial market infrastructures," Journal of Financial Stability, Elsevier, vol. 34(C), pages 1-11.
    4. Olivier Armantier & Adam Copeland, 2012. "Assessing the quality of “Furfine-based” algorithms," Staff Reports 575, Federal Reserve Bank of New York.
    5. Patricia Palhau Mora, 2018. "The “Too Big to Fail” Subsidy in Canada: Some Estimates," Staff Working Papers 18-9, Bank of Canada.
    6. Fuchun Li & Héctor Pérez Saiz, 2016. "Measuring Systemic Risk Across Financial Market Infrastructures," Staff Working Papers 16-10, Bank of Canada.
    7. Marius A. Zoican & Lucyna A. Górnicka, 2013. "Banking Unions: Distorted Incentives and Efficient Bank Resolution," Tinbergen Institute Discussion Papers 13-184/VI, Tinbergen Institute, revised 16 May 2014.
    8. Carlos Noton & Andrés Elberg, 2013. "Revealing Bargaining Power through Actual Wholesale Prices," Documentos de Trabajo 304, Centro de Economía Aplicada, Universidad de Chile.
    9. Olivier Armantier & Adam Copeland, "undated". "Challenges in identifying interbank loans," Economic Policy Review 00019, Federal Reserve Bank of New York.

    More about this item

    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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