Sidedness in the interbank market

We study the motivations of traders in the interbank market around the 2007–2009 subprime crisis. We extend the market sidedness of Sarkar and Schwartz (2009) to a panel setting to study the dispersion of beliefs for banks domiciled in different European countries. We find that country-level sidedness reveals information from the interbank market: sidedness leads sovereign credit default swap (CDS) spreads and reacts to central bank interventions introduced during the crisis. Our results map the linkages between the interbank market and sovereigns, as well as provide insight on the channels that give rise to the sovereign-bank nexus. •We study the motivations of traders in the interbank market around the 2007-09 subprime crisis using Sidedness of Sarkar and Schwartz (2009).•We estimate Sidedness within a panel setting using a regression-based formulation.•We show Sidedness from a European interbank market Granger causes (sometimes with feedback) sovereign CDS spreads.•Sidedness reacts to central bank interventions introduced during the crisis.