Relationship lending during a trust crisis on the interbank market: A friend in need is a friend indeed
We exploit uncertainty regarding banks’ involvement in money laundering activities as a natural experiment to study the functioning of the interbank market in uncertain times. We show that bank couples with a stronger relationship (i.e., more frequent and reciprocal interactions before the event) are more likely to continue lending to one another, and at lower interest rates. This is in line with a “helping hand” or “flight to friends” hypothesis during crisis.
Basel III proposes market discipline (banking disclosure requirements) as a key instrument to achieve soundness in the banking system. Consequently, it is necessary to test the presence of responses to bank risk on the part of the economic agents. This article empirically studies the mechanisms of market discipline (price, quantity, and maturity) in the interbank market: whether higher risk banks have to pay higher interest rates, and have less access to credit in the interbank market, especially for long maturity borrowing. Theoretically, bankers are well equipped to monitor other banks, but the interbank market also is a channel for contagion. Using a sample of 37 Mexican banks, from December 2008 to September 2012, and a dynamic panel model (SYS GMM estimator), I did not find evidence for discipline induced by peers.
The efficiency of the interbank market depends largely on its inherent disciplining mechanisms. This paper investigates the discipline mechanisms of Russia’s interbank market, testing the hypothesis that market discipline in Russia was strong enough to constrain excessive risk-taking by participating banks before, during, and after the 2008–2009 financial crisis. The existence and efficiency of quantity-based market discipline are investigated using the Arellano-Bover and Blundell-Bond linear dynamic panel-data estimations. Our approach detects market discipline only during the financial crisis, not before or after. Even during the crisis, the efficiency of market discipline in curbing bank risk-taking was rather low.