Market microstructure,banks’ behaviour and interbank spreads: evidence after the crisis |
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Authors: | Kapar Burcu Iori Giulia Gabbi Giampaolo Germano Guido |
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Institution: | 1.American University in Dubai, P.O. Box 28282, Dubai, United Arab Emirates ;2.Department of Economics, City, University London, Northampton Square, London, EC1V 0HB, UK ;3.Dipartimento di Studi Aziendali e Giuridici, Università di Siena, Piazza San Francesco 8, 53100, Siena, Italy ;4.SDA Bocconi School of Management, Via Ferdinando Bocconi 8, 20136, Milano, Italy ;5.Department of Computer Science, University College London, Gower Street, London, WC1E 6BT, UK ;6.Systemic Risk Centre, London School of Economics and Political Science, Houghton Street, London, WC2A 2AE, UK ; |
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Abstract: | We present a study of the European electronic interbank market of overnight lending (e-MID) before and after the beginning of the financial crisis. The main goal of the paper is to explain the structural changes of lending/borrowing features due to the liquidity turmoil. Unlike previous contributions that focused on banks’ dependent and macro information as explanatory variables, we address the role of banks’ behaviour and market microstructure as determinants of the credit spreads. We show that all banks experienced significant variations in their liquidity costs due to the sensitivity of interbank rates to the timing and side of trades. We argue that, while larger banks did experience better funding conditions after the crisis, this was not just a consequence of the “too big to fail” perception of the market. Larger banks have been able to play more strategically when managing their liquidity by taking advantage of the changing market microstructure. |
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