Endogenous Peer Effects in the Chilean Interbank Market: What Factors Matter when a Bank Lends (Borrows) in this Market?

This paper investigates how Chilean banks participate in the interbank market. Relying on proprietary interbank and bank datasets, we apply techniques borrowed from the common factor and 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. Our analysis 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? We observe monthly, bilateral lending/borrowing positions of eight banks in the Chilean interbank market, since 2009, as well as banks' balance-sheet characteristics. Because the assumption of independence among banks participating in the interbank network seems inadequate, we estimate the endogenous interbank connection matrix. Crucially, our results show that peer effects matter, that is, banks' positions in the interbank network not only depend on bank-specific factors, but constantly adjusts to their peers' decisions, as well.

Paula Margaretic
Université Tolouse I
Wednesday, August 16, 2017 - 13:00
Sala de Consejo, Beauchef 851, floor 4 - Departamento de Ingeniería Industrial, Universidad de Chile