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Market microstructure, banks' behaviour, and interbank spreads

Kapar, B., Iori, G. ORCID: 0000-0001-9443-9353, Gabbi, G. and Germano, G. (2019). Market microstructure, banks' behaviour, and interbank spreads. Journal of Economic Interaction and Coordination, doi: 10.1007/s11403-019-00248-3

Abstract

We present a study of the European electronic interbank market of overnight lending (e-MID) before and after the beginning of the financial crisis. The main goal of the paper is to explain the structural changes of lending/borrowing features due to the liquidity turmoil. Unlike previous contributions that focused on banks' dependent and macro information as explanatory variables, we address the role of banks' behaviour and market microstructure as determinants of the credit spreads. We show that all banks experienced significant variations in their liquidity costs due to the sensitivity of interbank rates to the timing and side of trades. We argue that, while larger banks did experience better funding conditions after the crisis, this was not just a consequence of the \too big to fail" perception of the market. Larger banks have been able to play more strategically when managing their liquidity by taking advantage of the changing market microstructure.

Publication Type: Article
Additional Information: This is a post-peer-review, pre-copyedit version of an article published in Journal of Economic Interaction and Coordination. The final authenticated version will be available online at: http://link.springer.com/journal/11403
Publisher Keywords: Interbank lending, market microstructure, subprime crisis, liquidity management
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Departments: School of Arts & Social Sciences > Economics
URI: http://openaccess.city.ac.uk/id/eprint/3950
[img] Text - Accepted Version
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