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Stressed, not frozen: the Federal Funds market in the financial crisis

Gara Afonso (), Anna Kovner and Antoinette Schoar ()

No 437, Staff Reports from Federal Reserve Bank of New York

Abstract: We examine the importance of liquidity hoarding and counterparty risk in the U.S. overnight interbank market during the financial crisis of 2008. Our findings suggest that counterparty risk plays a larger role than does liquidity hoarding: the day after Lehman Brothers? bankruptcy, loan terms become more sensitive to borrower characteristics. In particular, poorly performing large banks see an increase in spreads of 25 basis points, but are borrowing 1 percent less, on average. Worse performing banks do not hoard liquidity. While the interbank market does not freeze entirely, it does not seem to expand to meet latent demand.

Keywords: interbank lending; financial crisis; hoarding; fed funds; liquidity (search for similar items in EconPapers)
JEL-codes: D40 G21 G01 E40 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2010-03-01, Revised 2011-05-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fmk and nep-mon
Note: For a published version of this report, see Gara Afonso, Anna Kovner, and Antoinette Schoar, "Stressed, Not Frozen: The Federal Funds Market in the Financial Crisis," Journal of Finance 66, no. 4 (August 2011): 1109-39.
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Journal Article: Stressed, Not Frozen: The Federal Funds Market in the Financial Crisis (2011)
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