Fundamentals Matter: Idiosyncratic Shocks and Interbank Relations

53 Pages Posted: 21 Jun 2016

See all articles by Peter Bednarek

Peter Bednarek

Deutsche Bundesbank

Valeriya Dinger

Universität Osnabrück

Natalja von Westernhagen

Deutsche Bundesbank

Date Written: 2015

Abstract

Our results uncover a so far undocumented ability of the interbank market to distinguish between banks of different quality in times of aggregate distress. We show empirical evidence that during the 2007 financial crisis the inability of some banks to roll over their interbank debt was not due to a failure of the interbank market per se but rather to bank specific shocks affecting banks' capital, liquidity and credit quality as well as revised bank-level risk perceptions. Relationship banking is not capable of containing these frictions, as hard information seems to dominate soft information. In detail, we explore determinants of the formation and resilience of interbank lending relationships by analyzing an extensive dataset comprising over 1.9 million interbank relationships of more than 3,500 German banks between 2000 and 2012.

Keywords: financial stability, interbank market, aggregate and idiosyncratic shocks, relationship banking, risk perception, market discipline

JEL Classification: E50, G01, G10, G21

Suggested Citation

Bednarek, Peter and Dinger, Valeriya and von Westernhagen, Natalja, Fundamentals Matter: Idiosyncratic Shocks and Interbank Relations (2015). Bundesbank Discussion Paper No. 44/2015, Available at SSRN: https://ssrn.com/abstract=2797069 or http://dx.doi.org/10.2139/ssrn.2797069

Peter Bednarek (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany
004969 9566-8972 (Phone)

HOME PAGE: http://www.bundesbank.de

Valeriya Dinger

Universität Osnabrück ( email )

Neuer Graben
Osnabrück, 49074
Germany

Natalja Von Westernhagen

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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