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The effects of two-way lending between financial conglomerates in bilateral repo markets

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  • Carlos Cañón
  • Jorge Florez-Acosta
  • Karoll Gómez

Abstract

we examine how market structure, market power, and systemic risk respond to close and intense lending relationships between financial conglomerates (FCs) in non-centrally cleared bilateral repo. Using transaction-level data from Mexico, we document persistent and stable funding relationships between FC-affiliated banks and funds with two distinctive features: first, funding transactions are two-way, that is, a given pair of rival FCs provide lending to one another on the same day; second, two-way transactions are executed at lower average rates than one-way transactions. We show that two-way lending between FCs favours both market concentration and market power of FC-affiliated funds, and worsens the terms of trade of independent banks’ and funds’ lending. Furthermore, we find that the bank-level contribution to systemic risk increases with two-way lending. ******RESUMEN: Examinamos cómo la estructura del mercado, el poder de mercado y el riesgo sistémico re sponden a relaciones de financiamiento estrechas e intensas entre conglomerados financieros (CF) en mercados de repos bilaterales descentralizados. Usando datos a nivel transaccional de México, documentamos relaciones de financiamiento persistentes y estables entre bancos y fondos afiliados a CF con dos características distintivas: primero, las transacciones de financiamiento son bidirec cionales, es decir, un par dado de CF rivales proporciona financiamiento mutuo en el mismo día; segundo, las transacciones bidireccionales se ejecutan a tasas promedio más bajas en comparación con las transacciones unidireccionales. Mostramos que los préstamos bidireccionales entre los CF favorecen la concentración del mercado, aumentan el poder de mercado de los fondos afiliados a los CF y empeoran los términos de intercambio de las transacciones de crédito de bancos y fondos independientes. Además, encontramos que la contribución individual a nivel de banco al riesgo sistémico aumenta con los préstamos bidireccionales.

Suggested Citation

  • Carlos Cañón & Jorge Florez-Acosta & Karoll Gómez, 2023. "The effects of two-way lending between financial conglomerates in bilateral repo markets," Borradores de Economia 1246, Banco de la Republica de Colombia.
    • Handle: RePEc:bdr:borrec:1246
    DOI: 10.32468/be.1246
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    More about this item

    Keywords

    Repo market; Financial conglomerates; Relationship lending; two-way lending; Competition; Concentration; Market power; Financial stability; mercado repo; conglomerados financieros; relación de financiamiento; financiamiento bidireccional; competencia; concentración; poder de mercado; estabilidad financiera;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • L4 - Industrial Organization - - Antitrust Issues and Policies
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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