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Always Look on the Bright Side? Central Counterparties and Interbank Markets during the Financial Crisis

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  • Massimiliano Affinito

    (Bank of Italy)

  • Matteo Piazza

    (Bank of Italy)

Abstract
This paper joins the literature on the growing use of central counterparties (CCPs) in interbank markets by analyzing a scarcely explored source of risk, namely that CCPs may provide riskier banks that are cut off from the bilateral segment of the market with an alternative channel to access interbank funds, thereby eluding peer monitoring and potentially increasing the risks borne by the financial system. We investigate this issue using monthly granular data on Italian banks from June 2004 to June 2013 and we find that during the global financial crisis riskier banks increased the share of their interbank funding obtained via CCPs, due to both the impact of general market uncertainty and the heightened attention to counterparty risk in the bilateral segment of the market. More tellingly, we show that, for riskier banks only, this increase was associated with a decline in the duration of bilateral relationships, indicating that longer-standing counterparties, typically those with more information, tended to withdraw from relationships with those banks. This suggests that during our sample period the pool of banks operating via CCPs may have become riskier, confirming, from a novel perspective, the importance of the policy efforts to ensure that CCPs have a proper risk-management framework.

Suggested Citation

  • Massimiliano Affinito & Matteo Piazza, 2021. "Always Look on the Bright Side? Central Counterparties and Interbank Markets during the Financial Crisis," International Journal of Central Banking, International Journal of Central Banking, vol. 17(1), pages 231-283, March.
    • Handle: RePEc:ijc:ijcjou:y:2021:q:1:a:7
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    2. Massimiliano Affinito & Giorgio Albareto & Raffaele Santioni, 2016. "Purchases of sovereign debt securities by Italian banks during the crisis: the role of balance-sheet conditions," Questioni di Economia e Finanza (Occasional Papers) 330, Bank of Italy, Economic Research and International Relations Area.
    3. Massimo Minesso Ferrari, 2020. "The Real Effects of Endogenous Defaults on the Interbank Market," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 6(3), pages 411-439, November.
    4. Massimiliano Affinito & Matteo D'Amato & Raffaele Santioni, 2023. "The evolution of bank fees as a source of income: trends and new business models – evidence from Italy," Questioni di Economia e Finanza (Occasional Papers) 777, Bank of Italy, Economic Research and International Relations Area.
    5. Massimiliano Affinito, 2019. "What do almost 20 years of micro data and two crises say about the relationship between central bank and interbank market liquidity? Evidence from Italy," BIS Working Papers 821, Bank for International Settlements.
    6. Affinito, Massimiliano & Albareto, Giorgio & Santioni, Raffaele, 2022. "Purchases of sovereign debt securities by banks during the crisis: The role of balance sheet conditions," Journal of Banking & Finance, Elsevier, vol. 138(C).
    7. Silvia Del Prete & Stefano Federico, 2019. "Does trust among banks matter for bilateral trade? Evidence from shocks in the interbank market," Temi di discussione (Economic working papers) 1217, Bank of Italy, Economic Research and International Relations Area.
    8. Valerio Della Corte & Stefano Federico, 2019. "Two tales of foreign investor outflows: Italy in 2011-2012 and 2018," Questioni di Economia e Finanza (Occasional Papers) 535, Bank of Italy, Economic Research and International Relations Area.

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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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