Mapping change in the overnight money market

• We use a network clustering approach known as the map equation.
• We identify changes in lending patterns in the US overnight money market.
• Dramatic changes in lending patterns occur after the Federal Reserve begins paying interest on reserve balances.
• Analysis of micro-scale rates of change suggests these changes were triggered by the collapse of Lehman Brothers.

We use an information-theoretic approach to describe changes in lending relationships between financial institutions around the time of the Lehman Brothers failure. Unlike previous work that conducts maximum likelihood estimation on undirected networks our analysis distinguishes between borrowers and lenders and looks for broader lending relationships (multi-bank lending cycles) that extend beyond the immediate counter-parties. We detect significant changes in lending patterns following implementation of the Interest on Required and Excess Reserves policy by the Federal Reserve in October 2008. Analysis of micro-scale rates of change in the data suggests these changes were triggered by the collapse of Lehman Brothers a few weeks before.