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What drives interbank rates? Evidence from the Libor panel

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  • François-Louis Michaud
  • Christian Upper

Abstract

The risk premium contained in the interest rates on three-month interbank deposits at large, internationally active banks increased sharply in August 2007 and risk premia have remained at an elevated level since. This feature aims to identify the drivers of this increase, in particular the role of credit and liquidity factors. While there is evidence of a role played by credit risk, at least at lower frequencies, the absence of a close relationship between the risk of default and risk premia in the money market, as well as the reaction of the interbank markets to central bank liquidity provisions, point to the importance of liquidity factors for banks' day-to-day quoting behaviour.

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Article provided by Bank for International Settlements in its journal BIS Quarterly Review.

Volume (Year): (2008)
Issue (Month): (March)
Pages:

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Handle: RePEc:bis:bisqtr:0803f

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  1. Adam Ashcraft & Hoyt Bleakley, 2006. "On the market discipline of informationally opaque firms: evidence from bank borrowers in the federal funds market," Staff Reports 257, Federal Reserve Bank of New York.
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