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Information, liquidity and risk in the international interbank market: implicit guarantees and private credit market failure

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  • Henri Bernard
  • Joseph Bisignano
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    Abstract

    This paper considers the functioning of the international interbank market (IIBM), its contribution to the recent financial turbulence in Asia, and the policy issues presented by the existence of moral hazard and implicit guarantees of interbank liabilities. The paper provides statistical analysis to document the existence of contagion in the interbank market. While previous researchers had cautioned of the possibility of contagion in the IIBM, statistical support for its existence was relatively sparse. Within geographic regions, interbank market contagion appears much more prevalent within Asia than within Latin America. Between regions, the contagion appears to have been from Asia to Latin America. The paper discusses the possible role of implicit government guarantees of international interbank credit in contributing to inflows into emerging market countries, where significant information asymmetries made difficult the analysis of counterpart risk. It is argued that because of the serious informational problems in some segments of the international interbank system, the market is subject to potential disruption. The implicit guarantees given to risky borrowers in the IIBM can be thought of as a subsidy which helps to ensure the viability of the market. In principle, it is similar to a subsidy that is provided a market with extreme adverse selection problems. It can, however, also be a source of instability if not properly managed.

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    Bibliographic Info

    Paper provided by Bank for International Settlements in its series BIS Working Papers with number 86.

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    Length: 80 pages
    Date of creation: Mar 2000
    Date of revision:
    Handle: RePEc:bis:biswps:86

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    1. Jaffee, Dwight M & Russell, Thomas, 1984. "Imperfect Information, Uncertainty, and Credit Rationing: A Reply," The Quarterly Journal of Economics, MIT Press, vol. 99(4), pages 869-72, November.
    2. Salant, Stephen W & Henderson, Dale W, 1978. "Market Anticipations of Government Policies and the Price of Gold," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 627-48, August.
    3. Ilan Goldfajn & Taimur Baig, 1999. "Financial market contagion in the Asian crisis," Textos para discussão 400, Department of Economics PUC-Rio (Brazil).
    4. Salant, Stephen W, 1983. "The Vulnerability of Price Stabilization Schemes to Speculative Attack," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 1-38, February.
    5. Fernandez-Arias, Eduardo & DEC, 1994. "The new wave of private capital inflows : push or pull?," Policy Research Working Paper Series 1312, The World Bank.
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    Cited by:
    1. Garratt, Rodney & Mahadeva, Lavan & Svirydzenka, Katsiaryna, 2011. "The contagious capacity of the international banking network: 1985-2009," University of California at Santa Barbara, Economics Working Paper Series qt0r89f16p, Department of Economics, UC Santa Barbara.
    2. Edgardo Barandiarán, 2000. "Chile Después del Peso: Viviendo con el Dólar," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 37(110), pages 241-267.
    3. Eric Santor, 2003. "Banking Crises and Contagion: Empirical Evidence," Working Papers 03-1, Bank of Canada.

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