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The cost of collateralized borrowing in the Colombian money market: Does connectedness matter?

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  • Martínez, Constanza
  • León, Carlos

Abstract

We estimate two standard spatial econometric models in order to study the cost of collateralized borrowing among Colombian financial institutions, and its relationship with traditional determinants (leverage, size, and borrowing concentration), and with the observed linkages among financial institutions (spatial variables). Our main findings indicate that (i) the selected models are able to capture the extent and significance to which linkages matter for money market's liquidity pricing in the form of a spatial dependence parameter; (ii) spatial effects play a significant role in the pricing of liquidity in the collateralized money market; (iii) direct and spill-over effects from financial institutions’ size and the spatially lagged value of financial leverage and borrowing concentration most significantly determine the cost of collateralized borrowing; (iv) traditional determinants are of low explanatory power by themselves. Concurrent with contemporary lending relationships literature, our results emphasize the importance of connectedness among financial institutions, and are essential in the context of a macro-prudential perspective of financial stability and systemic risk.

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  • Martínez, Constanza & León, Carlos, 2016. "The cost of collateralized borrowing in the Colombian money market: Does connectedness matter?," Journal of Financial Stability, Elsevier, vol. 25(C), pages 193-205.
    • Handle: RePEc:eee:finsta:v:25:y:2016:i:c:p:193-205
    DOI: 10.1016/j.jfs.2015.10.003
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    2. Edoardo Rainone, 2015. "Price transmission in the unsecured money market," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Indicators to support monetary and financial stability analysis: data sources and statistical methodologies, volume 39, Bank for International Settlements.
    3. Rainone, Edoardo, 2020. "The network nature of over-the-counter interest rates," Journal of Financial Markets, Elsevier, vol. 47(C).
    4. Matabaro Borauzima, Luc & Niyondiko, Dominique & Muller, Aline, 2021. "Does cross-border banking enhance competition and cost efficiency? Evidence from Africa," Journal of Multinational Financial Management, Elsevier, vol. 62(C).
    5. Fabio Ortega-Castro & Freddy Cepeda-López & Constanza Martínez-Ventura, 2021. "Heterogeneidad en el uso de las fuentes de liquidez intradía en el sistema de pagos de alto valor," Borradores de Economia 1166, Banco de la Republica de Colombia.
    6. Carlos León & Javier Miguélez, 2020. "Interbank relationship lending in Colombia," Borradores de Economia 1118, Banco de la Republica de Colombia.
    7. Fabio Ortega & Carlos León, 2017. "Las transferencias compensadas por ACH Colombia: Un análisis desde la perspectiva de topología de redes," Borradores de Economia 990, Banco de la Republica de Colombia.
    8. León, Carlos & Miguélez, Javier, 2021. "Interbank relationship lending: A network perspective," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 573(C).

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    More about this item

    Keywords

    Money market; Interbank; Collateral; Lending relationships; Spatial econometrics;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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