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The pricing of bank lending and borrowing: evidence from the federal funds market

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  • C. H. Furfine

Abstract

This paper examines the terms of bank lending and borrowing by exploring pricing in the federal funds market, the market in which financial institutions trade overnight reserves. By exploiting a never-before-used dataset containing detailed information on every Fedwire transfer between financial institutions, interest rates actually paid by institutions in the funds market are calculated. The size of the trading institutions and their relative importance in the funds market are shown to affect the rates charged for overnight borrowing, thereby providing insight into the nature of competition in the federal funds market. Proxies for creditworthiness are also used to estimate the size and nature of very-short-horizon risk premia. Transaction volume and size-of-transaction effects are also explored, highlighting the role of liquidity in interest rate determination. Evidence of relationship banking among banks and an intraday credit market is also found.

Suggested Citation

  • C. H. Furfine, 1999. "The pricing of bank lending and borrowing: evidence from the federal funds market," BIS Working Papers 62, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:62
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    References listed on IDEAS

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    1. Duca, John V & Rosenthal, Stuart S, 1994. "Do Mortgage Rates Vary Based on Household Default Characteristics? Evidence on Rate Sorting and Credit Rationing," The Journal of Real Estate Finance and Economics, Springer, vol. 8(2), pages 99-113, March.
    2. Boot, Arnoud & Thakor, Anjan V. & Udell, Gregory F., 1987. "Competition, risk neutrality and loan commitments," Journal of Banking & Finance, Elsevier, vol. 11(3), pages 449-471, September.
    3. Cooperman, Elizabeth S & Lee, Winson B & Lesage, James P, 1991. "Geographical Integration and the Retail CD-Pricing Decisions of Large Depository Institutions," The Review of Economics and Statistics, MIT Press, vol. 73(3), pages 546-552, August.
    4. Bollerslev, Tim & Domowitz, Ian & Wang, Jianxin, 1997. "Order flow and the bid-ask spread: An empirical probability model of screen-based trading," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1471-1491, June.
    5. Mitchell A. Petersen & Raghuram G. Rajan, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, Oxford University Press, vol. 110(2), pages 407-443.
    6. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
    7. Rudebusch, Glenn D., 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 245-274, April.
    8. Huang, Roger D & Masulis, Ronald W, 1999. "FX Spreads and Dealer Competition across the 24-Hour Trading Day," Review of Financial Studies, Society for Financial Studies, vol. 12(1), pages 61-93.
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    Cited by:

    1. anonymous, 2000. "Improving public disclosure in banking," Staff Studies 173, Board of Governors of the Federal Reserve System (U.S.).
    2. Bech, Morten L. & Garratt, Rod, 2003. "The intraday liquidity management game," Journal of Economic Theory, Elsevier, vol. 109(2), pages 198-219, April.
    3. Schulz, Christian, 2011. "Liquidity requirements and payment delays - participant type dependent preferences," Working Paper Series 1291, European Central Bank.
    4. S├ębastien Philippe Kraenzlin & Benedikt von Scarpatetti, 2011. "Bargaining Power in the Repo Market," Working Papers 2011-14, Swiss National Bank.
    5. Silvio Schumacher, 2016. "Networks and lending conditions: Empirical evidence from the Swiss franc money markets," Working Papers 2016-12, Swiss National Bank.

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