EconPapers    
Economics at your fingertips  
 

Relationships in the Interbank Market

Jonathan Chiu and Cyril Monnet

Staff Working Papers from Bank of Canada

Abstract: The market for central bank reserves is mainly over-the-counter and exhibits a core-periphery network structure. This paper develops a model of relationship lending in the unsecured interbank market. In equilibrium, a tiered lending network arises endogenously as banks choose to build relationships to insure against liquidity shocks and to economize on the cost to trade in the interbank market. Relationships matter for banks’ bidding strategies at the central bank auction and introduce a relationship premium that can significantly distort the observed overnight rate. For example, it can explain some anomalies in the level of interest rates—namely, that banks sometimes trade above (below) the central bank’s lending (deposit) rate. The model also helps to explain how monetary policy affects the network structure of the interbank market and its functioning, and how the market responds dynamically to an exit from the floor system. We also use the model to discuss the potential effects of bilateral exposure limits on relationship lending.

Keywords: Interest rates; Monetary policy implementation; Transmission of monetary policy (search for similar items in EconPapers)
JEL-codes: E4 E5 (search for similar items in EconPapers)
Pages: 75 pages
Date: 2016
New Economics Papers: this item is included in nep-ban, nep-cse, nep-dge, nep-fmk and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://www.bankofcanada.ca/wp-content/uploads/2016/07/swp2016-33.pdf

Related works:
Journal Article: Relationships in the Interbank Market (2020) Downloads
Working Paper: Relationships in the interbank market (2016) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:16-33

Access Statistics for this paper

More papers in Staff Working Papers from Bank of Canada 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada. Contact information at EDIRC.
Bibliographic data for series maintained by (website@bank-banque-canada.ca).

 
Page updated 2025-01-07
Handle: RePEc:bca:bocawp:16-33