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The Cross-Section of Interbank Rates: A Nonparametric Empirical Investigation


  • Iori, G.
  • Kapar, B.
  • Olmo, J.


This paper analyzes the distribution of lending and borrowing credit spreads in the European interbank market conditional on main features of banks such as their size, operating currency and nationality. This is done by means of nonparametric kernel estimation methods for the cross-sectional density of interbank funding rates over a large sample of European banks trading in the e-MID market. The analysis is repeated over consecutive non-overlapping periods in order to assess and compare the effect of the factors during crisis and non-crisis periods. We find evidence of important differences between the borrowing and lending segment of the interbank market that are augmented during crises periods. Our results strongly support the existence of a size effect in the borrowing market. Largest banks enjoy the highest lending rates and the lowest borrowing rates. The collapse of Lehman Brothers accentuates the differences in funding conditions. In both borrowing and lending segments, crises are corresponded by high volatilities in daily funding costs. Banks using the Euro currency and in countries not affected by sovereign debt crises are benefited by lower funding costs. Our nonparametric analysis of densities conditional on banks' nationality suggests that distress in the interbank market can serve as an early warning indicator of sovereign risk.

Suggested Citation

  • Iori, G. & Kapar, B. & Olmo, J., 2012. "The Cross-Section of Interbank Rates: A Nonparametric Empirical Investigation," Working Papers 12/03, Department of Economics, City University London.
  • Handle: RePEc:cty:dpaper:12/03

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    References listed on IDEAS

    1. Freixas, Xavier & Parigi, Bruno M & Rochet, Jean-Charles, 2000. "Systemic Risk, Interbank Relations, and Liquidity Provision by the Central Bank," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 611-638, August.
    2. Michele Manna & Carmela Iazzetta, 2009. "The topology of the interbank market: developments in Italy since 1990," Temi di discussione (Economic working papers) 711, Bank of Italy, Economic Research and International Relations Area.
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    6. Silvia Gabrieli, 2010. "The functioning of the European interbank market during the 2007-08 financial crisis," CEIS Research Paper 158, Tor Vergata University, CEIS, revised 28 May 2010.
    7. Jeffrey Racine, 2008. "Nonparametric econometrics: a primer (in Russian)," Quantile, Quantile, issue 4, pages 7-56, March.
    8. Peter Hall & Jeff Racine & Qi Li, 2004. "Cross-Validation and the Estimation of Conditional Probability Densities," Journal of the American Statistical Association, American Statistical Association, vol. 99, pages 1015-1026, December.
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    12. Paolo Angelini & Andrea Nobili & Cristina Picillo, 2011. "The Interbank Market after August 2007: What Has Changed, and Why?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(5), pages 923-958, August.
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    Cited by:

    1. Markus Engler & Vahidin Jeleskovic, 2016. "Intraday volatility, trading volume and trading intensity in the interbank market e-MID," MAGKS Papers on Economics 201648, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    2. Miguel Sarmiento & Jorge Cely & Carlos León, 2015. "Monitoring the Unsecured Interbank Funds Market," Borradores de Economia 917, Banco de la Republica de Colombia.
    3. Annika Birch & Tomaso Aste, 2014. "Systemic Losses Due to Counter Party Risk in a Stylized Banking System," Papers 1402.3688,
    4. Brossard, Olivier & Saroyan, Susanna, 2016. "Hoarding and short-squeezing in times of crisis: Evidence from the Euro overnight money market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 40(C), pages 163-185.

    More about this item


    e-MID Interbank Market; Financial Crisis; Nonparametric kernel estimation; Sovereign risk; Systemic Risk;

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