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What Drives Interbank Loans? Evidence from Canada

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  • Narayan Bulusu
  • Pierre Guérin

Abstract

We identify the drivers of unsecured and collateralized loan volumes, rates and haircuts in Canada using the Bayesian model averaging approach to deal with model uncertainty. Our results suggest that the key friction driving behaviour in this market is the collateral reallocation cost faced by borrowers. Borrowers therefore adjust unsecured lending in response to changes in short-term cash needs, and use repos to finance persistent liquidity demand. We also find that lenders set rates and haircuts taking into account counterparty credit risk and collateral market price volatility.

Suggested Citation

  • Narayan Bulusu & Pierre Guérin, 2018. "What Drives Interbank Loans? Evidence from Canada," Staff Working Papers 18-5, Bank of Canada.
    • Handle: RePEc:bca:bocawp:18-5
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    References listed on IDEAS

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    Keywords

    Financial markets; Wholesale funding;

    JEL classification:

    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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