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The pricing of bank lending and borrowing: evidence from the federal funds market

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  • C. H. Furfine

Abstract

This paper examines the terms of bank lending and borrowing by exploring pricing in the federal funds market, the market in which financial institutions trade overnight reserves. By exploiting a never-before-used dataset containing detailed information on every Fedwire transfer between financial institutions, interest rates actually paid by institutions in the funds market are calculated. The size of the trading institutions and their relative importance in the funds market are shown to affect the rates charged for overnight borrowing, thereby providing insight into the nature of competition in the federal funds market. Proxies for creditworthiness are also used to estimate the size and nature of very-short-horizon risk premia. Transaction volume and size-of-transaction effects are also explored, highlighting the role of liquidity in interest rate determination. Evidence of relationship banking among banks and an intraday credit market is also found.

Suggested Citation

  • C. H. Furfine, 1999. "The pricing of bank lending and borrowing: evidence from the federal funds market," BIS Working Papers 62, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:62
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    Cited by:

    1. Dr. Silvio Schumacher, 2016. "Networks and lending conditions: Empirical evidence from the Swiss franc money markets," Working Papers 2016-12, Swiss National Bank.
    2. C. H. Furfine, 1999. "The price of risk at year-end: evidence from interbank lending," BIS Working Papers 76, Bank for International Settlements.
    3. Prof. Dr. Sébastien P. Kraenzlin & Benedikt von Scarpatetti, 2011. "Bargaining Power in the Repo Market," Working Papers 2011-14, Swiss National Bank.
    4. Sébastien Kraenzlin, 2009. "Interest Rate Setting on the Swiss Franc Repo Market," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 145(III), pages 351-377, September.
    5. Bech, Morten L. & Garratt, Rod, 2003. "The intraday liquidity management game," Journal of Economic Theory, Elsevier, vol. 109(2), pages 198-219, April.
    6. Schulz, Christian, 2011. "Liquidity requirements and payment delays - participant type dependent preferences," Working Paper Series 1291, European Central Bank.
    7. anonymous, 2000. "Improving public disclosure in banking," Staff Studies 173, Board of Governors of the Federal Reserve System (U.S.).

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