No. 266 - Are Banks Risk-Averse? A Note on the Timing of Operations in the Interbank Market

The paper presents a simple theory of intraday behavior in the interbank market. The timing of borrowing and lending operations depends on the available information on two key variables: the end-of-day balance from the clearing system and the short-term interest rate. When the former is the relevant source of uncertainty, risk-averse banks should tend to operate close to the end of the business day, when the balance becomes observable; conversely, when the interbank rate is relatively more volatile, operations should be shifted to the early morning, when the balance is not observed but the rate is.Tests based on the Italian interbank market support the hypothesis of risk-averse behavior by banks, an issue on which little empirical evidence is available.