A new paper by Farooq Akram and Casper Christophersen entitled “Interbank overnight interest rates – gains from systemic importance” analyses the Norvegian overnight interbank interest rates paid by banks. They find that during the Financial crisis, the interest rates were substantially below indicative quotes of interest rates provided by major banks. The interest rate variation is explained by the relative size and connectedness of the banks, implying favorable terms for banks of systemic importance.
Moreover, interest rates are found to depend not only on overall liquidity in the interbank market, but possibly on its distribution among banks as well, suggesting exploitation of market power by banks with surplus liquidity. They also find evidence of stronger effects on interest rates of systemic importance, credit ratings and liquidity demand and supply since the start of the current financial crisis.
An open-source implementation of the algorithm for uncovering the interbank loans was developed as part of this project. The algorithm is available as part of the Financial Network Analyzer.
Systemically important banks get better terms for their overnight borrowing
A new paper by Farooq Akram and Casper Christophersen entitled “Interbank overnight interest rates – gains from systemic importance” analyses the Norvegian overnight interbank interest rates paid by banks. They find that during the Financial crisis, the interest rates were substantially below indicative quotes of interest rates provided by major banks. The interest rate variation is explained by the relative size and connectedness of the banks, implying favorable terms for banks of systemic importance.
Moreover, interest rates are found to depend not only on overall liquidity in the interbank market, but possibly on its distribution among banks as well, suggesting exploitation of market power by banks with surplus liquidity. They also find evidence of stronger effects on interest rates of systemic importance, credit ratings and liquidity demand and supply since the start of the current financial crisis.
An open-source implementation of the algorithm for uncovering the interbank loans was developed as part of this project. The algorithm is available as part of the Financial Network Analyzer.