Cross-Border Liquidity, Relationships and Monetary Policy: Evidence from the Euro Area Interbank Crisis

Abbassi, Puriya; Bräuning, Falk; Fecht, Falko; Peydró, José‐Luis

doi:10.2139/ssrn.2570761

Cited by 27 publications

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“…The latter, however, is mainly driven by cross-border activity, while the domestic inter-bank flows have remained relatively resilient. This result is line with the conclusions of an analysis of bank-level data by Abbassi et al (2013Abbassi et al ( , 2015. Both the intra and extra euro area inter-bank deposits decline unusually during the crisis.…”

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confidence: 92%

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The national segmentation of euro area bank balance sheets during the financial crisis

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The national segmentation of euro area bank balance sheets during the financial crisis. Abstract: This paper analyses bank balance sheet data in conjunction with macroeconomic and other financial variables. Our aim is to understand the nature of the instability in financial intermediation in the euro area during the recent financial crises. We define "large changes" as significant departures in the actual evolution of balance sheet variables during the crisis from their historical association with the business and financial cycles. In the course of the global 2008-09 financial crisis, such "large changes" were features of the behaviour of cross-border inter-bank flows, both within the euro area and between the euro area and the rest of the world. By contrast, retail assets and liabilities, as well as interbank flows among banks of the same country, did not significantly deviate from historical regularities. Since the euro area sovereign crisis of 2011-12, "large changes" have been more pervasive. In particular, a significant home bias in the sovereign bond market has emerged.

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confidence: 92%

“…Abbassi et al, 2015;Garcia-de-Andoain et al, 2014). By distinguishing not only between domestic and crossborder flows but also between intra-euro area and extra-euro area flows, our richer model provides greater insight.…”

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The national segmentation of euro area bank balance sheets during the financial crisis

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“…The national interbank markets are more likely to be core-periphery, which implies that the joint European interbank network can best be characterized as a network of connected core-periphery networks. The structural persistence of the interbank network can be understood in the context of relationship lending (see, for example Braeuning and Fecht (2013), Abbassi, Braeuning, Fecht, and Peydro (2014), and Afonso, Kovner, and Schoar (2014)). …”

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A Network View on Interbank Market Freezes

Gabrieli

Georg

2014

SSRN Journal

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Reproduction permitted only if source is stated.ISBN 978-3-95729-108-0 (Printversion) Non-technical summary Research QuestionThe insolvency of the US investment bank Lehman Brothers on 15 September 2008 prompted widespread fears of an interbank market freeze in the euroarea. The eurosystem acted swiftly by adopting a set of "emergency measures", including a change of the monetary policy framework from a variable-rate auction-based tender system to a fixed-rate full-allotment regime. Since interbank markets are over-the-counter markets, studying them requires transaction-level payment system data which only recently became available. In this paper, we use a novel and unique dataset of all transactions settled between all European banks to answer a number of policy relevant questions about the developments in the interbank market around the Lehman insolvency. Was there actually a market freeze? If so, was it driven by concerns about counterparty risk? Did banks hoard liquidity as a consequence? How did the structure of the interbank market change as a result of the Lehman insolvency? Does the network structure matter for banks' access to liquidity? And did the "emergency measures" adopted by the Eurosystem stabilize the interbank market? ContributionIn this paper we provide an analysis of a large exogenous shock to the euroarea interbank market. We study how the reallocation of liquidity in the interbank market was affected by the shock on two different levels. On the aggregate level we are the first to complement existing empirical studies of the overnight interbank market by simultaneously studying the dynamics in the term segment. This allows us to identify the market mechanism that caused the turmoil in the euroarea interbank market. By taking a network view we add a completely novel structural dimension to the empirial literature on market freezes. ResultsFirst, we show that only the term segments of the interbank market exhibited a substantial drop in turnover, reminiscent of a market freeze. Banks engage in what can best be described as maturity shortening, which leads to an increase of lending in the overnight segment. Second, we put the structural change of the interbank network structure due to the Lehman insolvency and the Eurosystem's "emergency measures" in the context of the novel literature studying the effectiveness of financial networks. We show that the Lehman insolvency leads to a shrinking of the interbank network that was exacerbated by the "emergency measures" of the eurosystem that replaced a sizeable part of the interbank market with the central bank's balance sheet. The resulting network structure is likely to be less efficient than the network structure before the Lehman insolvency. Finally, we show that there is substantial heterogeneity in banks' access to liquidity, depending on the bank's position within the interbank network. AbstractWe study the liquidity allocation among European banks around the Lehman insolvency using a novel dataset of all interbank loans settled via the Euros...

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A Network View on Interbank Market Freezes

Gabrieli

Georg

2014

SSRN Journal

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We study the liquidity allocation among European banks around the Lehman insolvency using a novel dataset of all interbank loans settled via the Eurosystem's payment system TARGET2. Following the Lehman insolvency, lenders in the overnight segment become sensitive to counterparty characteristics and banks start hoarding liquidity by shortening the maturity of their interbank lending. This aggregate change in liquidity reallocation is accompanied by a substantial structural change that can best be characterized as a shrinking of the interbank network. Such a change in the network structure is consequential: banks with higher centrality within the network have better access to liquidity and are able to charge larger intermediation spreads. Therefore, we show the existence of a sizeable interbank lending channel.

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Cross-Border Liquidity, Relationships and Monetary Policy: Evidence from the Euro Area Interbank Crisis

Cited by 27 publications

References 82 publications

The national segmentation of euro area bank balance sheets during the financial crisis

The national segmentation of euro area bank balance sheets during the financial crisis

A Network View on Interbank Market Freezes

A Network View on Interbank Market Freezes

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