Drivers of demand and supply in the euro interbank market: The role of “key players” during the recent turmoil

We study frictions in trading patterns in the Euro money market. We characterize the structure of lending relations during the period of recent financial turmoil. We use a network-topology method on data from overnight transactions in the ElectronicMarket for Interbank Deposits (e-MID) to investigate two main issues. First, we characterize the roles of borrowers and lenders in long-run relationships by providing evidence on network formation at a 3-month frequency. Second, we identify the “key players” in the marketplace and study their behavior. In our formalization, key players are “locally-central banks” within a network that lend (or borrow) large volumes to (from) several counterparties, while borrowing (or lending) small volumes from (to) a small number of institutions. Our results are twofold.We show that the aggregate trading patterns in e-MID are characterized by largely asymmetric relations. This implies a clear difference in the roles of lenders and borrowers, with market positions changing only gradually over time.We also find that the large net lenders exploit their positions as network leaders by imposing aggressive pricing policies on their counterparties.