Drivers of demand and supply in the Euro interbank market: the role of “Key Players” during the recent turmoil

Abstract

We study frictions in trading patterns in the Euro money market. We characterize the structure of lending relations during the period of recent financial turmoil. We use a network-topology method on data from overnight transactions in the Electronic Market for Interbank Deposits (e-MID) to investigate two main issues. First, we characterize the roles of borrowers and lenders in long-run relationships by providing evidence on network formation at a 3-month frequency. Second, we identify the "key players" in the marketplace and study their behavior. In our formalization, key players are "locally-central banks" within a network that lend (or borrow) large volumes to (from) several counterparties, while borrowing (or lending) small volumes from (to) a small number of institutions. Our results are twofold. We show that the aggregate trading patterns in e-MID are characterized by largely asymmetric relations. This implies a clear difference in the roles of lenders and borrowers, with market positions changing B Paolo Zagaglia

Interbank money market concerns and actors’ strategies—A systematic review of 21st century literature

“…In two other studies on the Italian IMM data, both Liberati et al. (2015) and Temizsoy et al. (2015) found that although relationship lenders played an essential role as liquidity providers, especially amid the global financial crisis of 2007−2008, they nevertheless forced borrowers to pay premiums for transactions.…”

“…They confirmed that the trustworthy relationships relatively increase during crisis periods, while some of the untrustworthy ones disappear. In two other studies on the Italian IMM data, both Liberati et al (2015) and Temizsoy et al (2015) found that although relationship lenders played an essential role as liquidity providers, especially amid the global financial crisis of 2007−2008, they nevertheless forced borrowers to pay premiums for transactions. A recent study on the Italian interbank network by Kobayashi and Takaguchi (2018) confirmed that relationship lenders tend to impose higher interest rates on borrowers in times of financial distress.…”

“… Network structure —Studying the evolution of the interbank network structure and determining how even small and temporary changes in market parameters can lead to sometimes enormous and long‐term consequences in the market structure is another topic of interest for researchers for future research. Considering a more vital role for uncertainty in more extensive networks combined with the likelihood of further changes due to more realistic asymmetric structures (Duffy et al., 2019) and evaluating the influence of a group of factors; including policy measures (Gai et al., 2011), different types of credit (e.g., longer maturities and presence of collateral) (Barucca & Lillo, 2018), information asymmetry (Liberati et al., 2015), and banks’ behavioral components (e.g., bargaining on interest rates) (Gai et al., 2011; Lux, 2015); on these changes are the most important topics suggested by scholars for future research in this field. The study of different types of structure (e.g., hierarchical) and topology (e.g., core‐periphery) of real interbank networks is another area that is still of interest to researchers in this field (Fricke & Lux, 2015; Ladley, 2013).…”

“…Positive BB: Build concentrated relationships with lenders; borrow more from partners facing fewer shocks LB: Provide preferential access to borrowers; offer more to closest partners; gain much confidence; lend to partners more quickly and at lower rates (Affinito, 2012;Afonso et al, 2013;Blasques et al, 2018;Bräuning & Fecht, 2017;Cocco et al, 2009;Degryse et al, 2019;Orhun, 2017;Renard, 2017) Negative BB: Pay higher rates to partners; borrow larger amounts LB: Impose higher rates on riskier partners; force partners to pay premiums CB: Performs nonstandard monetary policy action (Abbassi et al, 2015;Hatzopoulos et al, 2015;Kobayashi & Takaguchi, 2018;Liberati et al, 2015;Liu et al, 2018;Temizsoy et al, 2015) History of the relationship Positive BB: Borrow from a partner for a long time; evaluate pre-existing relationships; keep existing relationships LB: Lend to a pre-existing partner; evaluate pre-existing relationships; keep existing relationships (Affinito, 2012;Finger & Lux, 2017;Iori et al, 2015;Kobayashi & Takaguchi, 2018;Liu et al, 2018;Temizsoy et al, 2015) Information Positive BB: Have an easy-to-read balance sheet LB: Seek partners with more in-d...…”

Bank Credit Supply and Firm Innovation

“…Even if the banks do not participate in the interbank market on their own but via a central institution, the ability of the central institution to transmit funds to smaller banks is hampered Liberati et al (2015). shows that key players in the European interbank market exert their market power in times of disruption on the interbank market.…”