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McFadden, Randall L. (2010) An empirical investigation of the Fed Funds and Repos Markets between banks in the USA. Centre for International Capital Markets discussion papers, 2010 (01). pp. 1-14. ISSN 1749-3412
The interlinkages between banks has been identified as one of the principle justifications for Too Big To Fail policies of banking authorities. This paper investigates the interlinkages present in banks in the USA using the Fed Funds and Repo positions as a proxy for exposures of individual banks. Reinforcing existing research, relatively strong correlations are revealed between size of exposure and size of bank, as well as correlations between exposure and distance from some money centers. Interesting fluctuations in these correlations are found to be consistent with perspective of banks as portfolios. The relationships identified by this study are evidence of fundamental economic phenomena, and provide support for the notion that bank interlinkages have the potential to engender banking crises across international boundaries.
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