Efficiency and Bargaining Power in the Interbank Loan Market

Abstract

Using detailed transactions-level data on interbank loans, 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's Large Value Transfer System, we show that although the market is fairly efficient, systemic 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 2007–8 financial crisis. We find that bargaining power tilted sharply toward borrowers as the financial crisis progressed and (surprisingly) toward riskier borrowers.

Additional Information

© 2016 Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association. Issue online: 28 April 2016. Version of record online: 28 April 2016. Manuscript Revised: 14 January 2015. Manuscript Received: 14 June 2013. 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. We thank Lana Embree, Matthias Fahn, Rod Garratt, Denis Gromb, Scott Hendry, Thor Koeppl, James MacKinnon, Antoine Martin, Sergio Montero, 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, IIOC (Arlington), and Queen's University for comments. Any errors are our own.

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