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

  • C. H. Furfine
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    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.

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    Paper provided by Bank for International Settlements in its series BIS Working Papers with number 62.

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    Length: 34 pages
    Date of creation: Mar 1999
    Date of revision:
    Handle: RePEc:bis:biswps:62
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    1. 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.
    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. 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.
    4. 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.
    5. 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.
    6. 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 546-52, August.
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