Abstract
This paper examines the reciprocal lending (RL) relationships between financial conglomerates (FCs) in the repo market. Using transaction-level data from Mexico, we find that the main economic force behind reciprocal lending relationships between FCs is related to the possibility to build deep and intense mutual lending relationships in the repo market and execute them at lower rates. Further, we find that RL favors market concentration of the repo lending in a few funds and increases fund market power. Finally, a deep and intense reciprocal relationship between financial conglomerates leads to systemic risk decreases. However, when funds depend more on a single bank to position their excess liquidity, or banks depend on particular FC-affiliated funds to have access to funding, the bank-level contribution to systemic risk increases.