Stressed, Not Frozen: The Federal Funds Market in the Financial Crisis





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    • Afonso and Kovner are with The Federal Reserve Bank of New York, and Antoinette Schoar is with MIT Sloan and NBER. We thank Andrew Howland for outstanding research assistance. We are grateful to Mark Flannery, James McAndrews, Adam Copeland, and seminar participants at the Finance Workshop at the Chicago Booth School of Business, the Capital Markets Workshop at LSE, NYU, the Federal Reserve Bank of New York, the NBER Corporate Finance Program Meeting (Chicago, April 23, 2010), and CEMFI for helpful comments. The views expressed in this paper are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.


We examine the importance of liquidity hoarding and counterparty risk in the U.S. overnight interbank market during the financial crisis of 2008. Our findings suggest that counterparty risk plays a larger role than does liquidity hoarding: the day after Lehman Brothers' bankruptcy, loan terms become more sensitive to borrower characteristics. In particular, poorly performing large banks see an increase in spreads of 25 basis points, but are borrowing 1% less, on average. Worse performing banks do not hoard liquidity. While the interbank market does not freeze entirely, it does not seem to expand to meet latent demand.