Fundamentals matter: Idiosyncratic shocks and interbank relations

Peter Bednarek (), Valeriya Dinger and Natalja von Westernhagen

No 44/2015, Discussion Papers from Deutsche Bundesbank

Abstract: Our results uncover a so far undocumented ability of the interbank market to distinguish between banks of different quality in times of aggregate distress. We show empirical evidence that during the 2007 financial crisis the inability of some banks to roll over their interbank debt was not due to a failure of the interbank market per se but rather to bankspecific shocks affecting banks' capital, liquidity and credit quality as well as revised banklevel risk perceptions. Relationship banking is not capable of containing these frictions, as hard information seems to dominate soft information. In detail, we explore determinants of the formation and resilience of interbank lending relationships by analyzing an extensive dataset comprising over 1.9 million interbank relationships of more than 3,500 German banks between 2000 and 2012.

Keywords: financial stability; interbank market; aggregate and idiosyncratic shocks; relationship banking; risk perception; market discipline (search for similar items in EconPapers)
JEL-codes: E50 G01 G10 G21 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-ban and nep-mac
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:442015

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