The role of bank relationships in the interbank market

Temizsoy, A., Iori, G. & Montes-Rojas, G. (2015). The role of bank relationships in the interbank market. Journal of Economic Dynamics and Control, 59, pp. 118-141. doi: 10.1016/j.jedc.2015.07.008

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Abstract

This paper empirically explores the effect of bank lending relationships in the interbank market. We use data from the e-MID market that represents the only transparent electronic platform in Europe and USA, unaffected by search costs and other fictions. We show that stable relationships exist and that they played a significant role during the 2007-2008 financial crisis. Trading with preferred counterparts is associated with more favorable rates for both lenders and borrowers, and carries larger trading volumes. The results point to a peer monitoring role of relationship lending, which contributes, at a time of financial distress, to a smooth liquidity redistribution among banks. Relationship lending thus plays an important positive role for financial stability.

Item Type: Article
Additional Information: © 2015, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International http://creativecommons.org/licenses/by-nc-nd/4.0/
Uncontrolled Keywords: interbank market, lending relationship, overnight loans
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Divisions: School of Social Sciences > Department of Economics
URI: http://openaccess.city.ac.uk/id/eprint/12356

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