Stressed, Not Frozen: The Federal Funds Market in the Financial Crisis
By Gara M. Afonso, A. Kovner, Antoinette Schoar. 2011
191 citations recorded by the source corpus.
This paper examines the impact of the financial crisis of 2008 on the federal funds market, specifically the bankruptcy of Lehman Brothers. Rather than a complete collapse of lending in the presence of a market wide shock, we see that banks become more restrictive in which counterparties they lend to. After Lehman Brothers, we find that amounts and spreads become more sensitive to borrower bank characteristics. While the market does not contract dramatically, lending rates increase. Further, the market does not seem to expand to meet the increased demand predicted by the drop in other bank funding markets. We examine discount window borrowing as a proxy for unmet fed funds demand and find that the fed funds market is not indiscriminate. As expected, borrowers who access the discount window have lower ROA. When looking at the lender side we do not find that the characteristics of the lending bank importantly affect the amount of interbank loans a bank makes. In particular, we do not find that worse performing banks start hoarding liquidity and indiscriminately reduce their lending.
Subfields: Economics and Econometrics, Finance
View Paper: https://www.semanticscholar.org/paper/9d3848103b7af6ec622c7b29621d539fdf038141
Citations in the corpus
- Liquidity hoarding and interbank market rates: The role of counterparty risk (2015, unknown): “In addition, Afonso et al. (2011) show that risk characteristics start to matter for borrowers but not for lenders in the unsecured overnight Fed Funds market following the collapse of Lehman Brothers, supporting the notion that own risk affects lenders and borrowers differently.”
- The Term Structure of Interbank Risk (2012, unknown): “Nevertheless, Afonso, Kovner, and Schoar (2009) show that credit risk in the federal funds market is managed via credit rationing instead of interest rates, so that in practice only creditworthy banks participate in the federal funds market.”
- Bank Size, Market Concentration, and Bank Earnings Volatility in the US (2012, unknown): “2 Afonso et al. (2010) report that in the immediate aftermath of Lehman’s bankruptcy there were sharp differences between large and small banks in their access to interbank credit: large banks show reduced amounts of daily borrowing after Lehman and borrowed from fewer counterparties.”
- Where the Risks Lie: A Survey on Systemic Risk (2017, unknown): “Focusing on the days immediately following the collapse of Lehman Brothers, Afonso, Kovner, and Schoar (2011) show that interbank loans in the USA became more sensitive to borrower characteristics, with higher spreads and lower borrowing for poorly performing large banks.”