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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. Bank of Canada Working Paper, 2012-29. Bank of Canada , Ottawa, Ontario, Canada. (Unpublished)

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Using detailed loan transactions-level data we examine the efficiency of an overnight interbank lending market, and the bargaining power of its participants. Our analysis relies on the equilibrium concept of the core, which imposes a set of no-arbitrage conditions on trades in the market. For Canada we show that while the market is fairly efficient, some degree of inefficiency persists throughout our sample. The level of inefficiency matches distinct phases of both the Bank of Canada’s operations as well as phases of the 2007- 2008 financial crisis, where more liquidity intervention implies more inefficiency. We find that bargaining power tilted sharply towards borrowers as the financial crisis progressed, and towards riskier borrowers. This supports a nuanced version of the Too- Big-To-Fail story, whereby participants continued to lend to riskier banks at favorable rates, not because of explicit support to the riskier banks provided by governmental authorities, but rather due to the collective self-interest of these banks.

Item Type:Report or Paper (Working Paper)
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URLURL TypeDescription ItemEarlier version of paper (Feb. 2012) ItemLater version of paper (2016)
Echenique, Federico0000-0002-1567-6770
Shum, Matthew0000-0002-6262-915X
Additional Information:© 2012 Bank of Canada. Bank of Canada working papers are theoretical or empirical works-in-progress on subjects in economics and finance. The views expressed in this paper are those of the authors. No responsibility for them should be attributed to the Bank of Canada. Acknowledgements We thank the Canadian Payments Association. We thank Lana Embree, Matthias Fahn, Rod Garratt, Denis Gromb, Scott Hendry, Thor Koeppl, Antoine Martin, Mariano Tappata, and James Thompson as well as seminar participants at the University of Western Ontario, Renmin University of China, the Bank of Canada workshop on financial institutions and markets, the FRBNY, and IIOC (Arlington) for comments. Any errors are our own.
Subject Keywords:Financial institutions; Payment, clearing, and settlement systems
Series Name:Bank of Canada Working Paper
Issue or Number:2012-29
Classification Code:JEL classification: C71, G21, G28, E58
Record Number:CaltechAUTHORS:20160329-102445567
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:65736
Deposited On:14 Dec 2016 23:45
Last Modified:26 Nov 2019 11:15

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