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Stressed Not Frozen: The Fed Funds Market In The Financial Crisis

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Executive Summary

This paper examines the impact of the financial crisis of 2008 on the federal funds market, specifically the bankruptcy of Lehman Brothers. Rather than a complete collapse of lending in the presence of a market wide shock, the authors see that banks become more restrictive in which counterparties they lend to. After Lehman Brothers, they find that amounts and spreads become more sensitive to borrower bank characteristics. While the market does not contract dramatically, lending rates increase. Further, the market does not seem to expand to meet the increased demand predicted by the drop in other bank funding markets.

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