This paper empirically investigates the effect of interbank relationship lending on banks' access to liquidity. Our analysis is based on German interbank payment data which we use to create a panel of unsecured overnight loans between 1079 distinct borrower-lender pairs. The data shows that banks rely on repeated interactions with the same counterparties to trade liquidity. For the price of liquidity, we find that in the run-up to the recent financial crisis of 2007/08 relationship lenders charged already higher interest rates to their borrowers after controlling for other bank specific characteristics and general market conditions. By contrast, during the crisis borrowers paid on average lower rates to their relationship lenders compared to spot lenders. The observed interest rate differences are statistically and economically significant and in line with theory that relationship lenders have private information about the creditworthiness of their close borrowers.

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An economy in which deposit-taking banks of a Diamond and Dybvig style and a financial market coexist is modeled in a simple framework closely related to Diamond (1997). Solely depending on the fraction of naïve households who cannot efficiently invest directly in the corporate sector, two different types of financial systems emerge. With the fraction comparatively low, the evolving financial system can be interpreted as market-oriented, whereas a high fraction brings about a bank-dominated financial system. In market-oriented systems, banks only provide naïve households with access to efficient investments; in bank-dominated systems, banks' deposit contracts also offer some degree of liquidity insurance. Consequently, compared to market-oriented financial systems, the household sector in bank-dominated financial systems holds a larger portfolio fraction in deposits and a smaller part in direct investments. Analyzing the resilience of the different financial systems to various types of shocks shows that moderately bank-dominated (or hybrid) financial systems are particularly fragile, because only in these systems do fire sales of assets by distressed banks cause a deterioration in asset prices that also precipitates other banks into crisis. (

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractThis paper studies the implications of cross-border financial integration for financial stability when banks' loan portfolios adjust endogenously. Banks can be subject to sectoral and aggregate domestic shocks. After integration they can share these risks in a complete interbank market. When banks have a comparative advantage in providing credit to certain industries, financial integration may induce banks to specialize in lending. An enhanced concentration in lending does not necessarily increase risk, because a well-functioning interbank market allows to achieve the necessary diversification. This greater need for risk sharing, though, increases the risk of cross-border contagion and the likelihood of widespread banking crises. However, even though integration increases the risk of contagion it improves welfare if it permits banks to realize specialization benefits.Keywords: Financial integration, specialization, interbank market, financial contagion JEL Classification: D61, E44, G21 1 Non technical summaryA key question for Europe and the world after several years of crisis is whether the process of financial integration should continue or whether slowing it down may bring advantages in terms of greater financial stability. One significant benefit of financial integration is that it generally improves risk sharing across borders. It reduces the impact of regional shocks on domestic consumption. Greater diversification through financial markets at the same time also allows realising specialisation benefits at the regional or firm level. When diversification of sectoral risks can be achieved through integrated financial markets, regions or firms can focus on those technologies in which they have a comparative advantage.Financial globalisation of the recent decades has been driven to a significant extent by a greater integration of interbank markets. But interbank integration not only provides greater scope for risk sharing. It also brings about the risk of cross-border financial contagion. If a regional shock exceeds the risk bearing capacities of a regional bank, it fails and cannot honour its commitments. This can lead to failures of banks abroad, which have lent money to it, are suspected by others to have done so (asymmetric information) or because of a general dry-up of liquidity. Thus from a welfare perspective financial integration is only beneficial if the expected benefits from greater risk-sharin...