Efficiency and Bargaining Power in the Interbank Loan Market
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This paper examined the efficiency of an overnight interbank lending market, and the bargaining power of its participants, and found that bargaining power tilted sharply towards borrowers as the financial crisis progressed, and (surprisingly) towards riskier borrowers.Abstract:
Using detailed transactions-level data on interbank loans, we examine the efficiency of an overnight interbank lending market, and the bargaining power of its participants. Our analysis relies on the equilibrium concept of the core, which imposes a set of no-arbitrage conditions on trades in the market. For Canada's Large-Value Transfer System, we show that while the market is fairly efficient, systemic inefficiency persists throughout our sample. The level of inefficiency matches distinct phases of both the Bank of Canada's operations as well as phases of the 2007-2008 financial crisis. We find that bargaining power tilted sharply towards borrowers as the financial crisis progressed, and (surprisingly) towards riskier borrowers.read more
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Table 2: Banks positions and prices 
Figure 1: Loan Quantities in LVTS 
Table 4 presents summary statistics of our variables of interest and explanatory variables for three sub-samples: (i) April 1, 2004 to February 28, 2006, (ii) March 1, 2006 to February 14, 2007, and 
Figure 8: Bargaining Power of the Lender 
Table 3: Inequalities Coalition Satisfies inequalities? 
Figure 9: Actual versus counterfactual bargaining power for crisis-period loans
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