The Bargaining Power in Taiwan Interbank Overnight Market

Abstract

The rate corridor regime, relying on lending and deposit facilities to set ceilings and floors for interbank overnight rates, has been practiced by many central banks. This paper modifies the theoretical model proposed by Bech and Klee (2011) to discuss the seller's bargaining power in Taiwan interbank overnight market under rate corridor system. We apply two-limit Tobit model to estimate the bargaining power. The empirical results show that the repo rate, policy indicator and index for reserves concentration have significantly positive relationship with seller's bargaining power. Meanwhile, the results imply that the interbank overnight rates rise with these three variables. The conclusions could be clearly observed from the predictions on the paths of the interbank overnight rate under various scenarios.

The Over‐the‐Counter Theory of the Fed Funds Market: A Primer

“…Lin, Hsu, and Wang () document that an increase in the lender's bargaining power leads to higher interbank rates in the Taiwan interbank overnight market. Also consistent with our results, Allen et al.…”

The Over-the-Counter Theory of the Fed Funds Market: A Primer

“…Our theory predicts a decline in average fed funds rate over a typical trading day if reserves are scarce (see, e.g., the top right panel of Figures 2, 3, 6, and 7). Lin, Hsu, and Wang (2013) document that an increase in the lender's bargaining power leads to higher interbank rates in the Taiwan interbank overnight market. Also consistent with our results, Allen et al (2012) find a positive relationship between lenders' bargaining power and interbank rates in the Canadian interbank market.…”