Market microstructure, banks' behaviour and interbank spreads: evidence after the crisis

Burcu Kapar, Giulia Iori, Giampaolo Gabbi and Guido Germano

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

Keywords: interbank lending; market microstructure; subprime crisis; liquidity manahement (search for similar items in EconPapers)
JEL-codes: F3 G3 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2020-01-01
New Economics Papers: this item is included in nep-ban and nep-mst
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Citations: View citations in EconPapers (2)

Published in Journal of Economic Interaction and Coordination, 1, January, 2020, 15(1), pp. 283 - 331. ISSN: 1860-711X

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http://eprints.lse.ac.uk/100467/ Open access version. (application/pdf)

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Journal Article: Market microstructure, banks’ behaviour and interbank spreads: evidence after the crisis (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:100467

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