The urgency to borrow in the interbank market

Abstract

We study the motivations of interbank market traders around the 2007–09 subprime crisis with a new statistic, Trading Urgency, that reveals the underlying urgency to borrow overnight funds. We find that Trading Urgency leads sovereign CDS spreads and reacts to non-standard central bank interventions introduced during the crisis. Our results shed light on the channels that give rise to the sovereign-bank nexus by mapping the linkages between the interbank market and sovereigns. • We study traders’ motivations in the interbank market around the 2007–09 crisis. • We create a statistic called Trading Urgency to measure the urgency to borrow. • Trading Urgency in the interbank market lead sovereign CDS spreads. • Trading Urgency react to non-standard central bank interventions.