The large-small bank dichotomy in the federal funds market

Despite the central importance of the federal fund market, little research has been undertaken on the micro-decision making of individual market participants and their interactions. This paper demonstrates that there are asymmetries of information between federal funds' lenders and borrowers th...

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Bibliographic Details
Published inJournal of banking & finance Vol. 10; no. 2; pp. 219 - 230
Main Authors Allen, Linda, Saunders, Anthony
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.06.1986
Elsevier
North-Holland Pub. Co
Elsevier Sequoia S.A
SeriesJournal of Banking & Finance
Subjects
Banks
Borrowing
Economic theory
Federal funding
Financial
Markets
Mathematical models
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Summary:Despite the central importance of the federal fund market, little research has been undertaken on the micro-decision making of individual market participants and their interactions. This paper demonstrates that there are asymmetries of information between federal funds' lenders and borrowers that can only be resolved through frequent and continuous trading. Smaller banks are constrained in their ability to borrow federal funds due to their size and location. It is shown that information asymmetries and resulting adverse selection problems may be resolved through the use of implicit multi-period contracts.
ISSN:0378-4266
1872-6372
DOI:10.1016/0378-4266(86)90006-3