SOAS Research Online

Abstract

The aim of this study is to examine the market microstructure and evolution of overnight lending rates in the interbank market in a single country. Interest in understanding the interbank market surged in the aftermath of the 2008 global financial crisis, consequently giving rise to several academic studies on the interbank market microstructure and price discovery process. This thesis extends the existing literature by introducing a discussion on the role of ownership, governance, and competitiveness in influencing the market microstructure and price discovery process of the interbank lending market. The study focuses primarily on the overnight segment of the market and uses generalized least squares regression on a unique panel dataset constructed from proprietary transaction-level and bank balance sheet data obtained from the Bank of Uganda (the central bank). The results of the study suggest the presence of a home field advantage in the interbank market, with domestic banks pricing loans more cheaply than foreign banks in the Ugandan interbank market. The results also reveal that competitiveness makes borrowers more attractive to relationship lenders. In addition, the results provide evidence of agency problems in interbank markets, as banks with powerful CEOs are less preferred lending counterparties, thus reducing the information benefits to the bank that are obtained from relationship lending. Also, it was observed that foreign exchange devaluation has a positive effect on relationship formation amongst banks in the interbank market. The empirical results also show that bank health and asset quality have varying effects on relationship formation and interbank loan pricing. The overall results provide key insights for policy makers and practitioners about the factors that influence the market microstructure and price discovery process in the interbank lending market.