The Great Liquidity Freeze: What Does It Mean for International Banking?
AbstractIn mid-September 2008, following the bankruptcy of Lehman Brothers, international interbank markets froze and interbank lending beyond very short maturities virtually evaporated. Despite massive central bank support operations and purchases of key assets, many financial markets remained impaired for a long time. Why was this funding crisis so much worse than other past major bank failures and why has it proved so hard to cure? This paper suggests that much of that answer lies in the balance sheets of international banks and their customers. It outlines the basic building blocks of liquidity management for a bank that operates in many currencies and then discusses how the massive development of foreign exchange (forex) and interest rate derivatives markets transformed banks’ strategies in this area. It explains how the pervasive interconnectedness between major banks and markets magnified contagion effects. Finally, the paper provides some recommendations for how strategic borrowing choices by international banks could make them more stable and how regulators could assist in this process.
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Bibliographic InfoPaper provided by Asian Development Bank Institute in its series ADBI Working Papers with number 291.
Length: 35 pages
Date of creation: 24 Jun 2011
Date of revision:
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More information through EDIRC
banking financial stability; financial markets; international banking; international interbank markets; liquidity management;
Other versions of this item:
- Dietrich Domanski & Philip Turner, 2011. "The Great Liquidity Freeze : What Does It Mean for International Banking?," Finance Working Papers 23245, East Asian Bureau of Economic Research.
- Dietrich Domanski & Philip Turner, 2011. "The Great Liquidity Freeze : What Does It Mean for International Banking?," Macroeconomics Working Papers 23245, East Asian Bureau of Economic Research.
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G01 - Financial Economics - - General - - - Financial Crises
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-07-02 (All new papers)
- NEP-BAN-2011-07-02 (Banking)
- NEP-CBA-2011-07-02 (Central Banking)
- NEP-IFN-2011-07-02 (International Finance)
- NEP-MAC-2011-07-02 (Macroeconomics)
- NEP-MON-2011-07-02 (Monetary Economics)
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