Interbank market integration under asymmetric information
AbstractWhile domestic interbank markets are often considered to work in an efficient way, cross-country bank lending appears to be subjected to market imperfections leading to persistent interest rate differentials. In a model where banks need to cope with liquidity shocks by borrowing or by liquidating assets, we study the scope for international interbank market integration with unsecured lending when cross-country information is noisy. We find that an equilibrium with integrated markets need not always exist, and that it coexists with one characterized by segmentation. A repo market reduces interest rate spreads and improves upon the segmentation equilibrium. However, it may destroy the unsecured integrated equilibrium. JEL Classification: G15, G20, F36
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Date of creation: Aug 2001
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Other versions of this item:
- Xavier Freixas, 2005. "Interbank Market Integration under Asymmetric Information," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 459-490.
- Freixas, X. & Holthausen, C., 2001. "Interbank Market Integration under Asymmetric Information," Papers 74, Quebec a Montreal - Recherche en gestion.
- Xavier Freixas & Cornelia Holthausen, 2001. "Interbank market integration under asymmetric information," Economics Working Papers 579, Department of Economics and Business, Universitat Pompeu Fabra.
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G20 - Financial Economics - - Financial Institutions and Services - - - General
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
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