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The role of bank relationships in the interbank market

Author

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  • Temizsoy, Asena
  • Iori, Giulia
  • Montes-Rojas, Gabriel
Abstract
This paper empirically explores the effect of bank lending relationships in the interbank market. We use data from the e-MID market that represents the only transparent electronic platform in Europe and USA, unaffected by search costs and other fictions. We show that stable relationships exist and that they played a significant role during the 2007–2008 financial crisis. Trading with preferred counterparts is associated with more favorable rates for both lenders and borrowers, and carries larger trading volumes. The results point to a peer monitoring role of relationship lending, which contributes, at a time of financial distress, to a smooth liquidity redistribution among banks. Relationship lending thus plays an important positive role for financial stability.

Suggested Citation

  • Temizsoy, Asena & Iori, Giulia & Montes-Rojas, Gabriel, 2015. "The role of bank relationships in the interbank market," Journal of Economic Dynamics and Control, Elsevier, vol. 59(C), pages 118-141.
    • Handle: RePEc:eee:dyncon:v:59:y:2015:i:c:p:118-141
    DOI: 10.1016/j.jedc.2015.07.008
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    References listed on IDEAS

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    More about this item

    Keywords

    Interbank market; Lending relationship; Overnight loans;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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