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Market microstructure, banks' behaviour and interbank spreads: evidence after the crisis

Kapar, B; Iori, G; Gabbi, G; Germano, G; (2020) Market microstructure, banks' behaviour and interbank spreads: evidence after the crisis. Journal of Economic Interaction and Coordination , 15 (1) pp. 283-331. 10.1007/s11403-019-00248-3. Green open access

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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.

Type: Article
Title: Market microstructure, banks' behaviour and interbank spreads: evidence after the crisis
Open access status: An open access version is available from UCL Discovery
DOI: 10.1007/s11403-019-00248-3
Publisher version: https://doi.org/10.1007/s11403-019-00248-3
Language: English
Additional information: This version is the author accepted manuscript. For information on re-use, please refer to the publisher's terms and conditions.
Keywords: Interbank lending, Market microstructure, Subprime crisis, Liquidity management
UCL classification: UCL
UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL BEAMS
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > Dept of Computer Science
URI: https://discovery.ucl.ac.uk/id/eprint/10109780
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