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Relationship Lending During A Trust Crisis On The Interbank Market: A Friend In Need Is A Friend Indeed

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  • Hans Degryse
  • Alexei Karas
  • Koen Schoors

Abstract

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.

Suggested Citation

  • Hans Degryse & Alexei Karas & Koen Schoors, 2019. "Relationship Lending During A Trust Crisis On The Interbank Market: A Friend In Need Is A Friend Indeed," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 19/954, Ghent University, Faculty of Economics and Business Administration.
    • Handle: RePEc:rug:rugwps:19/954
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    File URL: http://wps-feb.ugent.be/Papers/wp_19_954.pdf
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    References listed on IDEAS

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    1. Affinito, Massimiliano, 2012. "Do interbank customer relationships exist? And how did they function in the crisis? Learning from Italy," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3163-3184.
    2. Cocco, João F. & Gomes, Francisco J. & Martins, Nuno C., 2009. "Lending relationships in the interbank market," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 24-48, January.
    3. Falk Bräuning & Falko Fecht, 2017. "Relationship Lending in the Interbank Market and the Price of Liquidity," Review of Finance, European Finance Association, vol. 21(1), pages 33-75.
    4. Craig, Ben R. & Fecht, Falko & Tümer-Alkan, Günseli, 2015. "The role of interbank relationships and liquidity needs," Journal of Banking & Finance, Elsevier, vol. 53(C), pages 99-111.
    5. Vandermarliere, Benjamin & Karas, Alexei & Ryckebusch, Jan & Schoors, Koen, 2015. "Beyond the power law: Uncovering stylized facts in interbank networks," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 428(C), pages 443-457.
    6. Gara Afonso & Anna Kovner & Antoinette Schoar, 2011. "Stressed, Not Frozen: The Federal Funds Market in the Financial Crisis," Journal of Finance, American Finance Association, vol. 66(4), pages 1109-1139, August.
    7. Sergio Correia, 2014. "REGHDFE: Stata module to perform linear or instrumental-variable regression absorbing any number of high-dimensional fixed effects," Statistical Software Components S457874, Boston College Department of Economics, revised 21 Aug 2023.
    8. Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January.
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    Citations

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    Cited by:

    1. Galina Hale & Tümer Kapan & Camelia Minoiu & Philip Strahan, 2020. "Shock Transmission Through Cross-Border Bank Lending: Credit and Real Effects," The Review of Financial Studies, Society for Financial Studies, vol. 33(10), pages 4839-4882.
    2. Lucy Chernykh & Sergey Mityakov, 2022. "Behavior of Corporate Depositors During a Bank Panic," Management Science, INFORMS, vol. 68(12), pages 9129-9151, December.
    3. Bednarek, Peter & Dinger, Valeriya & Schultz, Alison & von Westernhagen, Natalja, 2023. "Banks of a feather: The informational advantage of being alike," Discussion Papers 09/2023, Deutsche Bundesbank.
    4. Morteza Alaeddini & Philippe Madiès & Paul J. Reaidy & Julie Dugdale, 2023. "Interbank money market concerns and actors’ strategies—A systematic review of 21st century literature," Journal of Economic Surveys, Wiley Blackwell, vol. 37(2), pages 573-654, April.
    5. León, Carlos & Miguélez, Javier, 2021. "Interbank relationship lending revisited: Are the funds available at a similar price?," Research in International Business and Finance, Elsevier, vol. 58(C).
    6. Basu, Shubhabrata & Aulakh, Preet S. & Munjal, Surender, 2021. "Pluralistic ignorance, risk perception, and the governance of the dark side in peer-to-peer transactions: Evidence from the Indian banking industry," Journal of Business Research, Elsevier, vol. 129(C), pages 328-340.
    7. Alexei Karas & William Pyle & Koen Schoors, 2021. "Deposit Insurance, Moral Hazard and Bank Risk," CESifo Working Paper Series 8867, CESifo.

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    More about this item

    Keywords

    banks; interbank market; trust crisis; relationship banking; helping-hand hypothesis;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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