Reproduction permitted only if source is stated.ISBN 978-3-95729-108-0 (Printversion) Non-technical summary Research QuestionThe insolvency of the US investment bank Lehman Brothers on 15 September 2008 prompted widespread fears of an interbank market freeze in the euroarea. The eurosystem acted swiftly by adopting a set of "emergency measures", including a change of the monetary policy framework from a variable-rate auction-based tender system to a fixed-rate full-allotment regime. Since interbank markets are over-the-counter markets, studying them requires transaction-level payment system data which only recently became available. In this paper, we use a novel and unique dataset of all transactions settled between all European banks to answer a number of policy relevant questions about the developments in the interbank market around the Lehman insolvency. Was there actually a market freeze? If so, was it driven by concerns about counterparty risk? Did banks hoard liquidity as a consequence? How did the structure of the interbank market change as a result of the Lehman insolvency? Does the network structure matter for banks' access to liquidity? And did the "emergency measures" adopted by the Eurosystem stabilize the interbank market? ContributionIn this paper we provide an analysis of a large exogenous shock to the euroarea interbank market. We study how the reallocation of liquidity in the interbank market was affected by the shock on two different levels. On the aggregate level we are the first to complement existing empirical studies of the overnight interbank market by simultaneously studying the dynamics in the term segment. This allows us to identify the market mechanism that caused the turmoil in the euroarea interbank market. By taking a network view we add a completely novel structural dimension to the empirial literature on market freezes. ResultsFirst, we show that only the term segments of the interbank market exhibited a substantial drop in turnover, reminiscent of a market freeze. Banks engage in what can best be described as maturity shortening, which leads to an increase of lending in the overnight segment. Second, we put the structural change of the interbank network structure due to the Lehman insolvency and the Eurosystem's "emergency measures" in the context of the novel literature studying the effectiveness of financial networks. We show that the Lehman insolvency leads to a shrinking of the interbank network that was exacerbated by the "emergency measures" of the eurosystem that replaced a sizeable part of the interbank market with the central bank's balance sheet. The resulting network structure is likely to be less efficient than the network structure before the Lehman insolvency. Finally, we show that there is substantial heterogeneity in banks' access to liquidity, depending on the bank's position within the interbank network. AbstractWe study the liquidity allocation among European banks around the Lehman insolvency using a novel dataset of all interbank loans settled via the Euros...

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This paper provides a detailed microstructure analysis of the euro money market by taking a network perspective. Banks are the nodes of the networks; overnight unsecured loans form the links connecting the nodes. The static analysis of network indicators confirms a number of stylised facts verified for other real complex systems: interbank networks are highly sparse, far from being complete, exhibit the small world property and a power-law distribution of degree (the number of counterparties each bank establishes links with). On the other hand the tendency of banks to cluster, i.e. to form groups where links are relatively denser, is much lower than in other real systems. The analysis of the topology before versus after the start of the crisis provides interesting insights into the potential for financial contagion; the partition of the network into several smaller sub-networks documents a move against market integration; heterogeneous patterns of indicators across banks of different size offer insights into banks' behaviour. Finally, the analysis of network centrality indicates unambiguously that the biggest banks are also the most central/influent in the system before the onset of the crisis. Things change after August 2007 since medium-sized and very small banks progressively increase their influence in the market as liquidity providers.

We study the liquidity allocation among European banks around the Lehman insolvency using a novel dataset of all interbank loans settled via the Eurosystem's payment system TARGET2. Following the Lehman insolvency, lenders in the overnight segment become sensitive to counterparty characteristics and banks start hoarding liquidity by shortening the maturity of their interbank lending. This aggregate change in liquidity reallocation is accompanied by a substantial structural change that can best be characterized as a shrinking of the interbank network. Such a change in the network structure is consequential: banks with higher centrality within the network have better access to liquidity and are able to charge larger intermediation spreads. Therefore, we show the existence of a sizeable interbank lending channel.

on access to and use of certain TARGET2 data. The Banque de France and the PSSC have checked the paper against the rules for guaranteeing the confidentiality of transaction-level data imposed by the PSSC pursuant to Article 1(4) of the above mentioned issue. The views expressed in the paper are solely those of the authors and do not necessarily represent the views of the Banque de France or of the Eurosystem.