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Efficiency and Bargaining Power in the Interbank Loan market

Allen, Jason and Chapman, James and Echenique, Federico and Shum, Matthew (2012) Efficiency and Bargaining Power in the Interbank Loan market. California Institute of Technology , Pasadena, CA. (Unpublished)

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We use data on interbank loans and a core equilibrium concept to examine the sufficiency of the interbank market in Canada and the bargaining power of its participants. We show that while the market is fairly sufficient, systemic inefficiency persists throughout our sample. The exact level of inefficiency matches distinct phases of both the Bank of Canada operating procedures as well as phases of the 2007-2008 financial crisis, where more intervention implies more inefficiency. We also find that bargaining power tilted sharply towards borrowers as the the financial crisis progressed. This supports a "weak" version of the Too-Big-To-Fail hypothesis, whereby market participants continued to lend to risky borrowers at favorable rates without the explicit involvement of governmental authorities.

Item Type:Report or Paper (Working Paper)
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URLURL TypeDescription ItemLater version of paper (Sept. 2012) ItemLater version of paper (2016)
Echenique, Federico0000-0002-1567-6770
Shum, Matthew0000-0002-6262-915X
Additional Information:February 18, 2012. The views expressed here are those of the authors and should not be attributed to the Bank of Canada. We thank the Canadian Payments Association who collects the data. We thank Lana Embree, Rod Garratt, Thor Koeppl and James Thompson as well as seminar participants at the University of Western Ontario, the Bank of Canada workshop on financial institutions and markets, and the FRBNY for comments. Any errors are our own.
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Deposited On:14 Dec 2016 23:45
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