Relationship Lending during a Trust Crisis on the Interbank Market : A Friend in Need is a Friend Indeed

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 even...

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Bibliographic Details
Published inIDEAS Working Paper Series from RePEc
Main Authors Degryse, Hans, Karas, A O, Schoors, Koen
Format Paper
LanguageEnglish
Published St. Louis Federal Reserve Bank of St. Louis 01.01.2019
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Summary: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.