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Reservation Rates in Interbank Money Markets

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  • EDOARDO RAINONE

Abstract

This paper proposes a dyadic econometric model with reservation rates to control for endogenous matching in interbank money markets. We apply our method to a unique data set and study the interbank market during the European sovereign debt crisis. The estimates uncover the existence of reservation rates, their omission can bias important quantities like the discount enjoyed by big banks, a potential measure of the “too‐big‐to‐fail” subsidy. We test predictions of various theories on the interbank market. The market did not freeze completely during the crisis and active peer monitoring was still in place under limited information asymmetry. Dispersion in rates and liquidity hoarding was driven by banks' nationality, regardless of the borrower quality.

Suggested Citation

  • Edoardo Rainone, 2025. "Reservation Rates in Interbank Money Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 57(7), pages 1931-1971, October.
    • Handle: RePEc:wly:jmoncb:v:57:y:2025:i:7:p:1931-1971
    DOI: 10.1111/jmcb.13104
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    References listed on IDEAS

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    1. 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, vol. 102(2), pages 344-362.
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