Stressed, Not Frozen: The Federal Funds Market in the Financial Crisis
Top Cited Papers
Open Access
- 19 July 2011
- journal article
- Published by Wiley in The Journal of Finance
- Vol. 66 (4) , 1109-1139
- https://doi.org/10.1111/j.1540-6261.2011.01670.x
Abstract
We examine the importance of liquidity hoarding and counterparty risk in the U.S. overnight interbank market during the financial crisis of 2008. Our findings suggest that counterparty risk plays a larger role than does liquidity hoarding: the day after Lehman Brothers' bankruptcy, loan terms become more sensitive to borrower characteristics. In particular, poorly performing large banks see an increase in spreads of 25 basis points, but are borrowing 1% less, on average. Worse performing banks do not hoard liquidity. While the interbank market does not freeze entirely, it does not seem to expand to meet latent demand.Keywords
This publication has 23 references indexed in Scilit:
- How Well Did Libor Measure Bank Wholesale Funding Rates During the Crisis?SSRN Electronic Journal, 2011
- Settlement delays in the money marketJournal of Banking & Finance, 2010
- The Interbank Market after August 2007: What Has Changed, and Why?SSRN Electronic Journal, 2009
- Effects of Central Bank Intervention on the Interbank Market during the Sub-Prime CrisisSSRN Electronic Journal, 2009
- Liquidity Hoarding and Interbank Market Spreads: The Role of Counterparty RiskSSRN Electronic Journal, 2009
- The Topology of the Federal Funds MarketSSRN Electronic Journal, 2008
- Money Market IntegrationJournal of Money, Credit and Banking, 2008
- Systemic Illiquidity in the Federal Funds MarketAmerican Economic Review, 2007
- On the Market Discipline of Informationally-Opaque Firms: Evidence from Bank Borrowers in the Federal Funds MarketSSRN Electronic Journal, 2006
- Standing Facilities and Interbank Borrowing: Evidence from the Federal Reserve's New Discount WindowInternational Finance, 2003