The price of liquidity: The effects of market conditions and bank characteristics

Fecht, Falko; Nyborg, Kjell G.; Rocholl, Jörg

doi:10.1016/j.jfineco.2011.05.015

Cited by 84 publications

(55 citation statements)

References 48 publications

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“…The resulting insights are important for the implementation of monetary policy and safeguarding financial stability. For instance, testing that the probability of being a super-spreader in the Colombian case is determined by financial institutions' size further supports some of the most salient findings of interbank relationships literature, as those reported in Cocco et al (2009), Afonso et al (2013), Fecht et al (2011). That is, lending relationships are motivated by too-big-to-fail implicit guarantees.…”

Section: Introductionsupporting

confidence: 54%

“…borrowing and lending) of financial markets, their ability to obtain lower funding rates, and their willingness to engage in riskier activities by means of increasing leverage and risk-taking (see Cocco et al, 2009;Bertay et al, 2013;IMF, 2014). Likewise, the size-related preferential attachment process supports evidence of smaller financial institutions relying on stable borrowing and lending relationships with large counterparties (see Cocco et al, 2009;Fecht et al, 2011;Afonso et al, 2013).…”

Section: What Makes a Super-spreader In The Colombian Interbank Fundsmentioning

confidence: 64%

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Identifying Central Bank Liquidity Super-Spreaders in Interbank Funds Networks

León

Machado²,

Sarmiento

2014

SSRN Journal

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We model the allocation of central bank liquidity among the participants of the interbank market by using network analysis' metrics. Our analytical framework considers that a superspreader simultaneously excels at receiving (borrowing) and distributing (lending) central bank's liquidity for the whole network, as measured by financial institutions' hub centrality and authority centrality, respectively. Evidence suggests that the Colombian interbank funds market exhibits an inhomogeneous and hierarchical network structure, akin to a coreperiphery organization, in which a few financial institutions fulfill the role of central bank's liquidity super-spreaders. Our results concur with evidence from other interbank markets and other financial networks regarding the flaws of traditional direct financial contagion models based on homogeneous and non-hierarchical networks. Also, concurrent with literature on lending relationships in interbank markets, we confirm that the probability of being a superspreader is mainly determined by financial institutions' size. We provide additional elements for the implementation of monetary policy and for safeguarding financial stability. JEL: E5, G2, L14

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Section: Introductionsupporting

confidence: 54%

Section: What Makes a Super-spreader In The Colombian Interbank Fundsmentioning

confidence: 64%

Identifying Central Bank Liquidity Super-Spreaders in Interbank Funds Networks

León

Machado²,

Sarmiento

2014

SSRN Journal

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“…However, this measure does not capture to what extent the current liquidity holdings of a bank permit is to fulfill the remaining reserve requirements over the rest of the maintenance period. Thus we follow Fecht et al (2011) and derive the normalized excess reserves (excess reserve) as a second measure of banks' liquidity status.…”

Section: Control Variablesmentioning

confidence: 99%

Relationship Lending in the Interbank Market and the Price of Liquidity

Bräuning

Fecht

2016

Review of Finance

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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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“…This combination of industry changes and macroeconomic effects suggests that financial deepening in support of economic growth is still something that needs to be nurtured (Gregorio and Guidotti 1995;Acemoglu and Zilibotti 1997;King and Levine 1993). A further consequence of the recent financial crisis is that lending through traditional banking channels is reduced (SAFE, 2009(SAFE, -2014, due in part to an increase in non-income bearing activity (Fecht, Nyborg and Rochall 2011). As banks are the primary source of external finance for SMEs, this has adverse consequences for investment by the sector.…”

Section: Literature Reviewmentioning

confidence: 99%

Can credit unions bridge the gap in lending to SMEs?

2015

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.Small firms continue to experience difficulty accessing adequate finance from formal external sources, notwithstanding many and varied institutional and policy initiatives introduced to address this seemingly perennial problem. Underpinning research indicates that information asymmetry is the principal reason for the finance gap, particularly for young firms. The aim of legislation introduced in the UK in 2012 is to utilise the credit union sector to increase the amount of new lending to SMEs. The rationale for this legislative change arises because credit unions typically operate within a defined geographic region, they can compile detailed local knowledge of small businesses and are therefore uniquely placed to minimise information asymmetries thereby reducing the funding gap for small firms. Despite this perceived advantage, credit unions have been reluctant to take advantage of this legislative and lending by credit unions to SMEs has been negligent to date. We investigate the reasons for this lack of engagement in SME lending by interviewing the chief executives of five credit unions in Scotland.Our findings reveal that the CEOs of the credit unions are reluctant to lend to SMEs at present, as they are uncomfortable with the level of risk associated with lending to a sector of which they have little experience or expertise. Furthermore, credit unions will need to offer attractive interest rates to compete with high street banks and an increasing number of microcredit providers. Policy makers need to better understand the structure and function of credit unions before assigning a greater role in SME lending. It is too early to say whether credit unions can play a significant role in SME lending, and our evidence suggests that structural issues must first be resolved before they become an established presence in the SME lending ecosystem.

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The price of liquidity: The effects of market conditions and bank characteristics

Cited by 84 publications

References 48 publications

Identifying Central Bank Liquidity Super-Spreaders in Interbank Funds Networks

Identifying Central Bank Liquidity Super-Spreaders in Interbank Funds Networks

Relationship Lending in the Interbank Market and the Price of Liquidity

Can credit unions bridge the gap in lending to SMEs?

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