Crises and liquidity in over-the-counter markets

We study the efficiency of liquidity provision by dealers and the desirability of policy intervention in over-the-counter (OTC) markets during crises. We emphasizes two OTC frictions: finding counterparties takes time, and trade is bilateral and involves bargaining. We model a crisis as a shock that reduces investors? asset demands, lasting until a random recovery time. In this context, dealers can provide liquidity to investors by accumulating asset inventories. When OTC frictions are severe, even well capitalized dealers may not find it privately optimal to accumulate inventories, and direct purchase by the government can improve welfare.     

Over-the-counter loans,adverse selection,and stigma in the interbank market

We study a model of interbank credit where physical and informational frictions limit the opportunities for intertemporal trade among banks and outside investors. Banks obtain loans in an over-the-counter market (involving search, bilateral matching, and negotiations over the terms of the loan) and hold assets of heterogeneous quality that in turn determine their ability to repay those loans. When asset quality is not observable by outside investors, information about the actions taken by a bank in the loan market may influence prices in the asset market. In particular, under some conditions, borrowing from the central bank can be regarded as a negative signal about the quality of the borrower?s assets and banks may be willing to borrow in the market at rates higher than the one offered by the central bank.     

Assessing Interbank Contagion Risk Using Consolidated Data

This study uses the maximum entropy method to estimate bilateral interbank exposure in order to simulate the contagion effect in the UK interbank market using consolidated data. Almost all existing studies use unconsolidated data, which could significantly distort the real contagion effect as the banking sectors of most countries are highly concentrated with most large banks owning a significant number of subsidiaries. The results show that exposure is much more severe using consolidated data, implying that some money center banks or systematically important banks were underestimated by the contagion model before the 2008 financial crisis.     

Zero-intelligence versus human agents: An experimental analysis of the efficiency of Double Auctions and Over-the-Counter markets of varying sizes

We study two well-known electronic markets: an over-the-counter (OTC) market, in which each trader looks for the best counterpart through bilateral negotiations, and a double auction (DA) market, in which traders post their quotes publicly. We focus on the DA–OTC efficiency gap and show how it varies with different market sizes (10, 20, 40, and 80 traders). We compare experimental results from a sample of 6400 undergraduate students in Economics and Management with zero-intelligence agent-based simulations. Simulation results show that the traded quantity increases with market size under both DA and OTC. Experimental results confirm the same tendency under DA, while the share of periods in which the traded quantity is lower than the efficient one increases with market size under OTC, ultimately leading to a DA–OTC efficiency gap increasing with the market size. We rationalize these results by putting forward a simple model of OTC market as a repeated bargaining procedure under incomplete information on buyers' valuations and sellers' costs. We show that efficiency decreases slightly with size due to two counteracting effects: acceptance rates in earlier interactions decrease with size, and earlier offers increase, but not always enough to compensate for the decrease in acceptance rates.     

Estimating bilateral exposures in the German interbank market: Is there a danger of contagion?

Credit risk associated with interbank lending may lead to domino effects, where the failure of one bank results in the failure of other banks not directly affected by the initial shock. Recent work in economic theory shows that this risk of contagion depends on the precise pattern of interbank linkages. We use balance sheet information to estimate a matrix of bilateral credit relationships for the German banking system and test whether the breakdown of a single bank can lead to contagion. We find that in the absence of a safety net, there is considerable scope for contagion that could affect a large proportion of the banking system. The financial safety net (in this case institutional guarantees for saving banks and cooperative banks) considerably reduces—but does not eliminate—the danger of contagion. Even so, the failure of a single bank could lead to the breakdown of up to 15% of the banking system in terms of assets.     

Central Banking and Post-Keynesian Economics

Abstract

The Post-Keynesian theory of endogenous money has given much attention to the role of the central bank in the money creation process. Circuit theory has neglected this role, in so far as it has focused on the relationship between banks and firms within a monetary production economy. The aim of this paper is therefore twofold. First, it intends to fill this gap in circuit theory, by providing a role for the central bank in settlement of interbank debts. Secondly, it aims at reinforcing the Post-Keynesian analysis of central bank money by considering both the money-purveying and the credit-purveying roles of the settlement institution in the interbank market. The result of this analysis is a more comprehensive theory of endogenous money, where the lender-of-last-resort facilities of a central bank are viewed as an endogenous phenomenon involving both a money creation and a credit operation between the central bank and the domestic banking system. In such a framework, monetary policy consists of setting the base rate of interest at a level that enables banks to limit their bilateral debt position in the interbank market, so as not to disrupt the workings of the payment system by either an illiquidity or an insolvency crisis.     

Competitive strategy and the implementation of a new network technology: the case of EFTPOS in the UK

This article analyses competrtion and cooperation between UK banks, as they attempted to develop a national syitem jor electronic funds transfer at the point of sale (EFTPOS) The banks formed a {epanste company, EFTPOS UK Ltd, to develop a technically sophisticated national system, but soon interbank divisions led the larger banks to develop national schemes from pnwourly 'exfierzmental' networks. Over a period of two years, competition came to be defined as that between banks supporing the Switch scheme and banks supporting a Visa afebit turd senme. During this period the banks made repeated public declarations of the commritment to EFTPOS UK and represented nascent, proprietary EFTPOS networks as computible with the national scheme. The process by which the banks attempted to make sente of that ambiguous competitive environment is described and we use the idea of metastable' competive rategies to represent the successive temporary commitments the banks made to particular ways of understanding thew competitiue environments. 'strategic maps are drawn to represent stages in bank thinking on the possible competitive outcomes of EFTPOS development.     

Multiple equilibrium overnight rates in a dynamic interbank market game

We analyse a two-period model of the interbank market, i.e. the market where banks trade liquidity. We assume that banks do not take the interbank interest rate as given, but instead negotiate on interest rates and transaction volumes with each other. The solution concept applied is the Shapley value. We show that there are a multiplicity of average equilibrium interest rates of the first period so that the average interest rate in this period does not convey any information on the expected liquidity situation on the interbank market. As the banks control not only the transaction volumes, but also the interest rates, they can leave the interest rates constant and adjust the transaction volumes when, for example, a liquidity deficit becomes more likely.     

同业业务发展能提升中国商业银行的效率吗*

本文采用Tobit面板模型，选取了2005—2013年中国16家上市商业银行为样本，研究同业业务发展对银行效率的影响。笔者通过随机前沿法（SFA）估计出银行的成本效率和盈利效率。从全样本的回归结果来看，银行发展同业业务对成本效率和盈利效率都有提升，但在不同时期和对不同类型的银行，影响效果存在差异。2005—2009年，无论是同业资产或同业负债业务对银行成本效率、盈利效率的提升作用都有限。2010年之后，同业负债对银行效率的提高有显著正向作用。不同规模的银行同业业务发展对效率的影响也不同。大型银行在2009年前后同业业务的发展对效率提升起到了较大的贡献作用。中小型商业银行在2005—2009年，无论是同业资产或同业负债业务都对银行成本效率、盈利效率提升作用有限。而在2010年之后，同业负债业务显著提高了银行的效率。     

What Do Data Say About Monetary Policy,Bank Liquidity and Bank Risk Taking?

This paper tests empirically the linkage between banks' investment and interbank lending decisions in response to interest rate changes. We draw conclusions for the monetary policy, which uses the interest rate as its main tool. Across European countries we find that the risk-free (i.e. monetary policy) interest rate negatively affects the liquidity retained by banks and the decision of a bank to be a lender in the interbank market. Instead, the interbank interest rate has a positive impact on these decisions. We also find that banks who lend show less risk-taking behaviour and tend to be smaller than those who are borrowers. Most importantly, the risk-free interest rate is positively correlated with loans investment and bank risk-taking behaviour.     

POLONIA dynamics during the years 2006–2012 and the effectiveness of the monetary Policy of the National Bank of Poland

In the study we investigate the effectiveness of the National Bank of Poland in counteracting the negative results of the financial crisis in the Polish interbank market. The situation was exceptional in a sense, that during the period of the financial crisis the Polish interbank market experienced liquidity surplus, and the main problem of the central bank was to regain confidence among commercial banks and stimulate interbank transactions. We concentrate on the spread between the rate of overnight interbank loans and the reference rate and based upon its dynamics we assess the monetary policy of the Polish central bank. Using econometric techniques we study how the central bank influenced the spread, when its control over it weakened and when was it strengthened. The study is supported by the results of the survey directed to the headquarters of commercial banks. We conclude that the ability of the central bank to control overnight rate was temporarily lost during the first phases of the financial crisis, but gradually regained after implementation of the confidence pact.     

What broad banks do, and markets don’t: Cross-subsidization

We show that interbank markets are a poor substitute for “broad” banks that operate across regions or sectors. In the presence of regional or sectoral asset and liquidity shocks, interbank markets can distribute liquidity efficiently, but fail to respond efficiently to asset shocks. Broad banks can condition on the joint distribution of both shocks and, hence, achieve an efficient internal allocation of capital. This allocation involves the cross-subsidization of loans across regions or sectors. Compared to regional banks that are linked through well-functioning interbank markets, broad banks lead to higher levels of aggregate investment, higher output, and less fluctuations within regions. However, broad banks generate endogenously aggregate uncertainty.     

Bilateral matching and bargaining with private information

We study equilibria of a dynamic matching and bargaining game (DMBG) with two-sided private information bilateral bargaining. The model is a private information replica of Mortensen and Wright (2002). There are two kinds of frictions: time discounting and explicit search costs. A simple necessary and sufficient condition on parameters for existence of a nontrivial equilibrium is obtained. This condition is the same regardless whether the information is private or not. In addition, it is shown that when the discount rate is sufficiently small, the equilibrium is unique and has the property that every meeting results in trade.     

Sovereign risk,interbank freezes,and aggregate fluctuations

This paper shows how spillovers from sovereign risk to banks׳ access to wholesale funding establish a bank-sovereign nexus. In a dynamic stochastic general equilibrium set-up, heterogeneous banks give rise to an interbank market where government bonds are used as collateral. Government borrowing under limited commitment is costly ex ante as bank funding conditions tighten when the quality of collateral drops. These spillovers, by impeding interbank intermediation, lower the penalty from defaulting due to an interbank freeze during a recession and propagate aggregate shocks to the macroeconomy. The model is calibrated using Greek data and is capable of reproducing stylized facts from the European sovereign debt crisis. In an application, we show that the ECB׳s non-standard financing operations mitigate the adverse feedback mechanism.     

A Note on Multi-Issue Two-Sided Bargaining: Bilateral Procedures

This note considers a two-sided multi-issue bargaining problem in which players that belong to the same “side” may have conflicting priorities regarding the different negotiated issues. The note examines different bilateral bargaining procedures and shows the different equilibrium settlements that they yield. In particular the note examines the possibility that group heterogeneity (conflicting priorities) may be exploited in order to gain a better settlement. The different potential outcomes that are implied by the different procedures explain why we often observe such intense negotiation over bargaining procedures. Moreover, the conflict over procedure can be substantial, among parties with common interest as well as between opposing players. Journal of Economic Literature Classification Number: C7.     

Cooperative choice of corporate social responsibility in a bilateral monopoly model

This article presents an examination of a linear bilateral monopoly model with endogenous and cooperative choice of corporate social responsibility (CSR) level. This article also describes an investigation of the effects of cooperative choice of CSR on the market and welfare. New findings are explicit derivation of the necessary and sufficient condition for solving a double marginalization problem in the bilateral monopoly model with CSR. In addition, this report is the first demonstrating that cooperative CSR with Nash bargaining improves consumer surplus, social welfare and each firm’s profit to a level higher than that achieved through noncooperative CSR. Furthermore, cooperative CSR with Nash bargaining is shown to be capable of completely solving the double marginalization problem generated by a bilateral monopoly, although the manufacturer and the retailer are not vertically integrated.     

EFFICIENCY AND BARGAINING POWER IN THE INTERBANK LOAN MARKET

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 although 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 2007–8 financial crisis. We find that bargaining power tilted sharply toward borrowers as the financial crisis progressed and (surprisingly) toward riskier borrowers.     

The United States and United Kingdom activities of Japanese banks, 1980–1988

This paper analyzes the United States and United Kingdom activities of Japanese banks by integrating their activities in these two markets with the regulatory environment for banks in Japan and Japan's overall external financial position, as well as with business opportunities in the two host countries. The paper concludes that the regulatory environment in Japan, including restraints on interest rates and possible quantitative restraints, has had an impact on activities of Japanese banks in these two foreign markets.Japanese banks appear to have adjusted to their domestic regulatory environment by using their London branches as a flexible funding source and their U.S. offices in extending commercial and industrial loans to Japan-based companies as well as a substitute location for interbank trading. In both markets Japanese banking offices are large net barrowers from unrelated banks because of constraints on raising funds in their homer market.     

Lenders on the storm of wholesale funding shocks: saved by the central bank?

We provide empirical evidence on banks’ responses to shocks in the wholesale funding market, using data of 181 euro area banks over the period from August 2007 to June 2013. Responses to funding liquidity shocks for both banks’ lending volumes and loan rates, to households and corporates, are analysed in a panel VAR framework. We thereby distinguish banks by country, extent of Eurosystem borrowing, bank size and capitalization. The results show that shocks in the securities and interbank markets have significant effects on loan rates and credit supply, particularly of banks in stressed countries of the periphery. The results also suggest that central bank liquidity has mitigated this effect on lending volumes. Lending to nonfinancial corporations is more sensitive to wholesale funding shocks than lending to households. Lending volumes of large banks that are typically more dependent on wholesale funding and banks with large exposure to sovereign bonds show stronger responses to wholesale funding shocks.     

BETTER LATER THAN NEVER? AN EXPERIMENT ON BARGAINING UNDER ADVERSE SELECTION

A central result in the literature on bargaining with asymmetric information is that the uninformed party (buyer) can screen the informed party (seller) over time. Screening eliminates trade failures that are otherwise common in the presence of adverse selection, but the downside of the bargaining institution is the cost associated with repeated offers and time frictions. This article reports an experimental test of these predictions. We find that rates of trade are substantially higher in the bargaining institution than in control treatments in which we remove the possibility to make repeated offers (take‐it‐or‐leave‐it offer) or the time frictions. However, we also observe a persistent overdelay before agreements are reached, that is, bargaining takes longer than theoretically predicted. This lowers efficiency below its predicted level and below the level observed in the take‐it‐or‐leave‐it offer institution. We identify possible channels for overdelay in the form of fairness preferences and loss aversion, concluding that there are important behavioral deviations from the standard model that are detrimental to the efficiency of bargaining under incomplete information.