Authors: Asena Temizsoy, Giulia Iori, Gabriel Montes-Rojas
Journal: Journal of Economic Dynamics and Control, Volume 59,Pages 118–141 (2015)
Status: Journal Articles
Abstract: This paper empirically explores the effect of bank lending relationships in the interbank market. We use data from the e-MID market that represents the only transparent electronic platform in Europe and USA, unaffected by search costs and other fuctions. We show that stable relationships exist and that they played a significant role during the 2007-2008 financial crisis. Trading with preferred counterparts is associated with more favorable rates for both lenders and borrowers, and carries larger trading volumes. The results point to a peer monitoring role of relationship lending, which contributes, at a time of financial distress, to a smooth liquidity redistribution among banks. Relationship lending thus plays an important positive role for financial stability.