We study how the wholesale funding behavior of banks is affected by the presence of unsecured and collateralized money markets. We present a theoretical model for money markets in which there are different levels of partnership between banks, and banks have access to unsecured and collateralized lending. We show that in the case of an increase in the systemic risk, there is a strong lending concentration between partner banks in the unsecured money market; however the levels of concentration are reduced in the collateralized lending, due to hedging effects between different types of collateral which induce to find different collateral assets in partner and no-partner banks. This result is stronger when there is a negative correlation between the collateralized asset and the level of repayment in the unsecured market.
We test the empirical predictions of our model with money market data. On top of standard measures of flight-to-liquidity and systemic risk, we construct novel risk and liquidity shock measures to study their impact on highly central banks, as well as on all banks. Shocks have a direct interpretation. While the risk shock induces banks to migrate from one market to the other, the liquidity shock induces banks to use more intensely all money markets. We find support that money market interaction affect the lending behavior of banks as described by our model.