Pairwise Trading in the Money Market During the European Sovereign Debt Crisis

Abstract

This paper studies over-the-counter (OTC) trading in the unsecured interbank market for euro funds. The goal of our analysis is to identify the determinants of the probability of trading, the bilateral rate, and the quantity exchanged during the European sovereign debt crisis. We show how the specific features of this market bring to a non-standard estimation framework. We propose a dyadic econometric model with shadow rates to control for potentially endogenous matching with the counterparty, and construct a unique dataset containing banks' characteristics and bilateral trades to study trading patterns. The estimates provide mild evidence towards the existence of shadow rates. Active monitoring decreased market access to low equity and illiquid borrowers, while dispersion in rates and quantities was mainly driven by banks' nationality, especially at the peak of the crisis.

Interbank market and funding liquidity risk in a stock‐flow consistent model

“…In the attempt to build a payment system framework with more realistic features of the financial system within an overdraft economy, the two main goals of the European Real Time Gross Settlement system (Target 2) should be considered: meet reserve requirements and make payments (Rainone, 2017). For the sake of simplicity, considerations about collateral requirements and National Central Banks will be left aside.…”

Identifying Deposits' Outflows in Real-Time

“…The unsecured money market used to be the most important channel to reallocate liquidity among banks. Even if the market was dramatically hit by the 2007-08 global financial crisis and the Sovereign debt crisis, it did not totally freeze (Afonso et al, 2011;Angelini et al, 2011;Rainone, 2017). 31 In TARGET2 we can identify precisely the unsecured money market operations of the e-MID.…”

Bad Sovereign or Bad Balance Sheets? Euro Interbank Market Fragmentation and Monetary Policy, 2011-2015

“…Frutos et al (2016) provide evidence that stress in the unsecured euro money market led to less cross-border transactions, particularly in the second half of 2011, which they consider as a measure of financial fragmentation. Rainone (2017) proposes a dyadic econometric model to analyze pairwise trading on the European interbank market during the sovereign debt crisis. He finds significant dispersion in rates and quantities driven by bank nationality and balance sheet items, especially during the peak of the crisis.…”