What Drives Interbank Loans? Evidence from Canada
Narayan Bulusu and
Pierre Guérin ()
Staff Working Papers from Bank of Canada
We identify the drivers of unsecured and collateralized loan volumes, rates and haircuts in Canada using the Bayesian model averaging approach to deal with model uncertainty. Our results suggest that the key friction driving behaviour in this market is the collateral reallocation cost faced by borrowers. Borrowers therefore adjust unsecured lending in response to changes in short-term cash needs, and use repos to finance persistent liquidity demand. We also find that lenders set rates and haircuts taking into account counterparty credit risk and collateral market price volatility.
Keywords: Financial markets; Wholesale funding (search for similar items in EconPapers)
JEL-codes: C55 E43 G23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:18-5
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