Working Paper: NBER ID: w15806
Authors: Gara Afonso; Anna Kovner; Antoinette Schoar
Abstract: This paper examines the impact of the financial crisis of 2008 on the federal funds market, specifically the bankruptcy of Lehman Brothers. Rather than a complete collapse of lending in the presence of a market wide shock, we see that banks become more restrictive in which counterparties they lend to. After Lehman Brothers, we find that amounts and spreads become more sensitive to borrower bank characteristics. While the market does not contract dramatically, lending rates increase. Further, the market does not seem to expand to meet the increased demand predicted by the drop in other bank funding markets. We examine discount window borrowing as a proxy for unmet fed funds demand and find that the fed funds market is not indiscriminate. As expected, borrowers who access the discount window have lower ROA. When looking at the lender side we do not find that the characteristics of the lending bank importantly affect the amount of interbank loans a bank makes. In particular, we do not find that worse performing banks start hoarding liquidity and indiscriminately reduce their lending.
Keywords: Federal Funds Market; Financial Crisis; Lehman Brothers; Interbank Lending
JEL Codes: G01; G21; G24; G38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government's intervention (AIG bailout) (G28) | alleviated fears of counterparty risk for large banks (F65) |
| Government's intervention (AIG bailout) (G28) | return to pre-crisis spreads for large banks (F65) |
| Lehman Brothers' bankruptcy (G33) | increased differentiation between high and low-quality borrowers (G51) |
| Lehman Brothers' bankruptcy (G33) | nuanced response to the crisis across different bank sizes and performance metrics (E44) |
| Lehman Brothers' bankruptcy (G33) | banks became more restrictive in lending (G21) |
| Lehman Brothers' bankruptcy (G33) | significant changes in spreads and access to credit (F65) |
| Lehman Brothers' bankruptcy (G33) | sharp decline in borrowing amounts for large banks with high percentages of nonperforming loans (G21) |
| Lehman Brothers' bankruptcy (G33) | increased interest rate spreads for large banks (F65) |