The Role of Interbank Relationships and Liquidity Needs

44 Pages Posted: 21 Jun 2016

See all articles by Ben R. Craig

Ben R. Craig

Federal Reserve Bank of Cleveland; Deutsche Bundesbank

Falko Fecht

Deutsche Bundesbank; Frankfurt School of Finance & Management

Gunseli Tumer-Alkan

VU University Amsterdam; Vrije Universiteit Amsterdam, School of Business and Economics

Multiple version iconThere are 3 versions of this paper

Date Written: 2013

Abstract

In this paper, we focus on the interconnectedness of banks and the price they pay for liquidity. We assess how the concentration of credit relationships and the position of a bank in the network topology of the system influence the bank's ability to meet its liquidity demand. We use quarterly data of bilateral interbank credit exposures between all German banks from 2000 to 2008 to measure interbank relationships and the network characteristics. We match these data with the bids placed by the individual banks in the European Central Bank's (ECB) weekly repo auctions. The bids measure each bank's willingness to pay for liquidity since they had variable rate tenders with a 'pay-your-bid' price. Controlling for bank characteristics and the daily fulfillment of reserve requirements, we find that banks with a more diversified borrowing structure in the interbank market bid significantly less aggressively and pay a lower price for liquidity in the ECB's main refinancing operations. These findings suggest that incentives to diversify bank liquidity risk dominate the benefits of private information. When the network position of the bank is taken into account, we find that central lenders in the money market bid more aggressively in the auctions.

Keywords: Interbank markets, liquidity, relationship lending, networks

JEL Classification: G21, E58, D44, L14, D85

Suggested Citation

Craig, Ben R. and Fecht, Falko and Tumer-Alkan, Gunseli and Tumer-Alkan, Gunseli, The Role of Interbank Relationships and Liquidity Needs (2013). Bundesbank Discussion Paper No. 54/2013, Available at SSRN: https://ssrn.com/abstract=2796950 or http://dx.doi.org/10.2139/ssrn.2796950

Ben R. Craig (Contact Author)

Federal Reserve Bank of Cleveland ( email )

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Deutsche Bundesbank

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Falko Fecht

Deutsche Bundesbank ( email )

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HOME PAGE: http://https://www.bundesbank.de/en/falko-fecht

Frankfurt School of Finance & Management ( email )

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Gunseli Tumer-Alkan

VU University Amsterdam ( email )

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Amsterdam, 1081 HV
Netherlands

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 5987430 (Phone)

HOME PAGE: http://https://personal.vu.nl/g.tumeralkan/

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