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The role of interbank relationships and liquidity needs

Author Info

  • Craig, Ben R.
  • Fecht, Falko
  • Tümer-Alkan, Günseli

Abstract

In this paper, we focus on the interconnectedness of banks and the price they pay for liquidity. We assess how the concentration of credit relationships and the position of a bank in the network topology of the system influence the bank's ability to meet its liquidity demand. We use quarterly data of bilateral interbank credit exposures between all German banks from 2000 to 2008 to measure interbank relationships and the network characteristics. We match these data with the bids placed by the individual banks in the European Central Bank's (ECB) weekly repo auctions. The bids measure each bank's willingness to pay for liquidity since they had variable rate tenders with a 'pay-your-bid' price. Controlling for bank characteristics and the daily fulfillment of reserve requirements, we find that banks with a more diversified borrowing structure in the interbank market bid significantly less aggressively and pay a lower price for liquidity in the ECB's main refinancing operations. These findings suggest that incentives to diversify bank liquidity risk dominate the benefits of private information. When the network position of the bank is taken into account, we find that central lenders in the money market bid more aggressively in the auctions.

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Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Papers with number 54/2013.

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Date of creation: 2013
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Handle: RePEc:zbw:bubdps:542013
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Keywords: Interbank markets; liquidity; relationship lending; networks;

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Find related papers by JEL classification:
  • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
  • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
  • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
  • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
  • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation

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  1. Bech, Morten L. & Atalay, Enghin, 2008. "The topology of the federal funds market," Working Paper Series 0986, European Central Bank.
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  19. Linzert, Tobias & Nautz, Dieter & Breitung, Jorg, 2006. "Bidder behavior in central bank repo auctions: Evidence from the Bundesbank," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 16(3), pages 215-230, July.
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  21. Linzert, Tobias & Nautz, Dieter & Bindseil, Ulrich, 2007. "Bidding behavior in the longer term refinancing operations of the European Central Bank: Evidence from a panel sample selection model," Journal of Banking & Finance, Elsevier, vol. 31(5), pages 1521-1543, May.
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