Efficiency and bargaining power in the interbank loan market

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Canada Working Paper ; No. 2012-29

Classification and Topics

• Classification: Wirtschaft ; Cooperative Games ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Financial Institutions and Services: Government Policy and Regulation ; Central Banks and Their Policies
• Subject: Financial institutions ; Payment, clearing, and settlement systems

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Allen, Jason ; Chapman, James ; Echenique, Federico ; Shum, Matthew
• Event: Veröffentlichung
• (who): Bank of Canada
• (where): Ottawa
• (when): 2012

Further information

• DOI: doi:10.34989/swp-2012-29
• Handle: http://hdl.handle.net/10419/80761
• Last update: 10.03.2025, 11:44 AM CET