The effects of crisis on the interbank markets and sovereign risk: empirical investigations

The 2007-2008 global financial turmoil is the most severe crisis since the Great Depression. Starting with the sub-prime defaults in the United States, it quickly spills over into other markets leading to the collapses of many financial institutions, worldwide banks bailouts, downturns in asset prices and also to sovereign debt crises. The aim of this thesis is to empirically investigate the repercussions of this financial crisis on interbank market and sovereign risk. In Chapter one, we empirically explore the effect of bank lending relationships in the interbank market. We use data from the e-MID market that represents the only transparent electronic platform in Europe and the United States, unaffected by search costs and other actions. We show that stable relationships exist and that they play a significant role during the 2007-2008 financial crisis. Trading with preferred counterparts is associated with more favorable rates for both lenders and borrowers, and carries larger trading volumes. The results point to a peer monitoring role of relationship lending, which contributes, at a time of financial distress, to a smooth liquidity redistribution among banks. Relationship lending thus plays an important positive role for financial stability. Chapter two investigates the role of banks' network centrality in the interbank market on their funding rates. Specifically we analyze transaction data from the e-MID market, over the 2006-2009 period, which encompasses the global financial crisis. We show that interbank spreads are significantly affected by both local and global measures of connectedness. The effects of network centrality increased as the financial crisis evolved. Local measures show that having more links increases borrowing costs for borrowers and reduces premia for lenders. For global network centrality, borrowers receive a significant discount if they increase their intermediation activity and become more central, while lenders pay in general a premium (i.e. receive lower rates) for centrality. This provides evidence of the `too-interconnected-to-fail' hypothesis. Chapter three draws attention to the effect of monetary policies and international linkages on European countries sovereign risks. Using a Global VAR method that allows for interdependencies across individual variables within and across units, we model government bond credit default swaps (CDS) relative to Germany by domestic, global, monetary and weighted foreign variables, where weights are calculated based on the countries' fiscal positions. We find evidence of positive correlation between sovereign bond CDS and risk aversion for almost all countries in the eurozone. When the European Central Bank (ECB) increases the refinancing rate, we observe an increase in risk of sovereign bonds of all countries due to negative environment in Euro area. A decline in money aggregate (M3) leads to all countries becoming more fragile, hence increasing sovereign risk. The shocks that stem from monetary policy changes (i.e. an increase in ECB refinancing rate) causes a rise in sovereign risk due to sensitivity to crisis and uncertainty in Euro area. In contrast, monetary policies have an opposite impact on Greece due to its relative worse performance

Quantifying preferential trading in the e-MID interbank market

Interbank markets allow credit institutions to exchange capital for purposes of liquidity management. These markets are among the most liquid markets in the financial system. However, liquidity of interbank markets dropped during the 2007-2008 financial crisis, and such a lack of liquidity influenced the entire economic system. In this paper, we analyze transaction data from the e-MID market which is the only electronic interbank market in the Euro Area and US, over a period of eleven years (1999-2009). We adapt a method developed to detect statistically validated links in a network, in order to reveal preferential trading in a directed network. Preferential trading between banks is detected by comparing empirically observed trading relationships with a null hypothesis that assumes random trading among banks doing a heterogeneous number of transactions. Preferential trading patterns are revealed at time windows of 3-maintenance periods. We show that preferential trading is observed throughout the whole period of analysis and that the number of preferential trading links does not show any significant trend in time, in spite of a decreasing trend in the number of pairs of banks making transactions. We observe that preferential trading connections typically involve large trading volumes. During the crisis, we also observe that transactions occurring between banks with a preferential connection occur at larger interest rates than the complement set - an effect that is not observed before the crisis

The effect of S-0/X-0 ratio on inert cod fraction in pharmaceutical wastewaters under aerobic and anaerobic treatment

The aim of this study was to investigate the effect of the ratio between COD and biomass (SO/Xo) on inert COD fraction in pharmaceutical wastewaters under aerobic and anaerobic conditions. In this concept, wastewater diluted to 2000 mg.L-1 with the same initial COD and biomass concentration of 50 mg.L-1 were treated in batch reactors to determine the inert COD fraction. The pharmaceutical wastewater consists of a lot of volatile organic compounds, and high concentrations of COD may inhibit particularly the aerobic systems. The aerobic and anaerobic batch runs were operated for 37 days and 86 days, respectively [1]. The results of the aerobic inert COD experiment indicated that the biological removal was only 19%, and 81% of the initial COD level has been removed by air stripping. The anaerobic experiments were carried out at five different S-0/X-0 ratios and an efficiency of 88 % could be provided. It was seen that increasing S-0/X-0 ratios did not change the soluble inert COD (SI). Some unexpected peaks could be observed in raw wastewater, possibly originating from additive effects of particular wastewater fractions increasing COD by degradation or destroyed cell material. Additionally, the concentrations of the volatile fatty acids (VFAs) and their behavior in the inert systems were analyzed and discussed

Network centrality and funding rates in the e-MID interbank market

This paper empirically investigates the role of banks’ network centrality in the interbank market on their funding rates. Specifically we analyze transaction data from the e-MID market, the only electronic interbank market in the Euro Area and US, over the period 2006–2009 that encompasses the global financial crisis. We show that interbank spreads are significantly affected by both local and global measures of connectedness. The effects of network centrality increased as the financial crisis evolved. Local measures show that having more links increases borrowing costs for borrowers and reduces premia for lenders. For global network centrality, borrowers receive a significant discount if they increase their intermediation activity and become more central, while lenders pay in general a premium (i.e. receive lower rates) for centrality. This provides evidence of the ‘too-interconnected-to-fail’ hypothesis