Lending relationships in the interbank market

Cocco, J F, Gomes, F and Martins, N C (2009) Lending relationships in the interbank market. Journal of Financial Intermediation, 18 (1). pp. 24-48. ISSN 1042-9573

Abstract

We use a unique dataset to show that relationships are an important determinant of banks' ability to access interbank market liquidity. More precisely, we find that: (i) banks with a larger reserve imbalance are more likely to borrow funds from banks with whom they have a relationship, and to pay a lower interest rate than otherwise; (ii) smaller banks and banks with more non-performing loans tend to have limited access to international markets, and rely more on relationships; (iii) relationships are established between banks with less correlated liquidity shocks. These results suggest that relationships allow banks to insure liquidity risk in the presence of market frictions such as transaction and information costs. Our analysis explicitly controls for the endogeneity of bank relationships.