Abstract:

We explore the impact of relationship lending on the interbank debt maturity structure of banks using data from the e-MID market covering both pre- and post-Lehman periods. We study the term structure and maturity shortening of interbank lending as an indicator of risk in times of stress. We identify bank-level and pair-level variables which are shown to contain information about the behaviour of lending relations during times of stress. Using a two-part fractional response model we show that durable liquidity relationships increase the probability of contracting term loans, but do not prevent maturity shortening during periods of acute stress. Finally, we find that lenders with concentrated short-term interbank liability structure tend to reduce their own long term lending, which confirms the roll-over risk viewpoint of term interbank market freeze. Our findings are relevant for the modeling of interbank networks under stress and the design of forward looking stress tests for the banking system.

Citation:

Saroyan, S. (2022). 'Counterparty choice, maturity shifts and market freezes: lessons from the e-MID interbank market'. INET Oxford Working Paper No. 2022-28.
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