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The role of bank relationships in the interbank market

Asena Temizsoy, Giulia Iori () and Gabriel Montes-Rojas ()

Journal of Economic Dynamics and Control, 2015, vol. 59, issue C, 118-141

Abstract: This paper empirically explores the effect of bank lending relationships in the interbank market. We use data from the e-MID market that represents the only transparent electronic platform in Europe and USA, unaffected by search costs and other fictions. We show that stable relationships exist and that they played a significant role during the 2007–2008 financial crisis. Trading with preferred counterparts is associated with more favorable rates for both lenders and borrowers, and carries larger trading volumes. The results point to a peer monitoring role of relationship lending, which contributes, at a time of financial distress, to a smooth liquidity redistribution among banks. Relationship lending thus plays an important positive role for financial stability.

Keywords: Interbank market; Lending relationship; Overnight loans (search for similar items in EconPapers)
JEL-codes: G2 G3 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:59:y:2015:i:c:p:118-141

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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