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Relationship Lending in the Interbank Market and the Price of Liquidity

Falk Bräuning and Falko Fecht ()

Review of Finance, 2017, vol. 21, issue 1, 33-75

Abstract: We empirically investigate the effect that relationship lending has on the availability and pricing of interbank liquidity. Our analysis is based on a daily panel of unsecured overnight loans between 1,079 distinct German bank pairs from March 2006 to November 2007, a period that includes the 2007 liquidity crisis that marked the beginning of the 2007–08 global financial crisis. We find that (i) relationship lenders are more likely to provide liquidity to their closest borrowers, (ii) particularly opaque borrowers obtain liquidity at lower rates when borrowing from their relationship lenders, and (iii) during the crisis, relationship lenders provided cheaper loans to their closest borrowers. Our results hold after controlling for search frictions as well as a large set of (time-varying) bank and bank-pair control variables and fixed effects. While we find some indication that lending relationships help banks reduce search frictions in the over-the-counter interbank market, our results establish that bank-pair relationships have a significant impact on interbank credit availability and pricing due to mitigating uncertainty about counterparty credit quality.

Keywords: Interbank market; Relationship lending; Financial crisis; Central counterparty; Financial contagion (search for similar items in EconPapers)
JEL-codes: D61 E44 G10 G21 (search for similar items in EconPapers)
Date: 2017
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Related works:
Working Paper: Relationship lending in the interbank market and the price of liquidity (2016) Downloads
Working Paper: Relationship lending in the interbank market and the price of liquidity (2012) Downloads
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Review of Finance is currently edited by Amit Goyal, Marcin Kacperczyk, Daniel Paravisini, Christine Parlour, Chris Parsons, Joel Peress and Geoffrey Tate

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