This paper revolves around a simple, but interesting question: Do other banks' lending and borrowing choices in the interbank market affect the lending/borrowing decision of any two banks or does this decision only depend on bank-specific factors? To address this question, we rely on a unique dataset and apply techniques borrowed from the spatial econometric literature, to study which elements contribute to explain how much a bank lends (borrows), at bilateral level, to other banks in (from) the interbank market.
We observe monthly, bilateral lending/borrowing positions of 15 banks in the Chilean interbank market, from January 2009 to March 2016, as well as banks' balance sheet characteristics. Crucially, our results show that peer effects matter, that is, banks' bilateral positions in the interbank market not only depend on bank-specific factors, as it has been previously shown in the literature, but constantly adjust to their peers' decisions, as well. Furthermore, we find that there is a considerable degree of heterogeneity between banks participating in the Chilean interbank market. This heterogeneity manifests both in the way banks interact in the market, as well as in the parameter estimates measuring the strength to which other banks'
lending/borrowing choices in the interbank market affect the lending/borrowing position of two specific banks. Therefore, peer effects matter, but their importance is not homogenous across banks.