Interbank market integration under asymmetric information
AbstractWe argue that the main barrier to an integrated international interbank market is the existence of asymmetric information between different countries, which may prevail in spite of monetary integration or successful currency pegging. In order to address this issue, we study the scope for international interbank market integration with unsecured lending when cross-country information is noisy. We find not only that an equilibrium with integrated markets need not always exist, but also that when it does, the integrated equilibrium may coexist with one of interbank market segmentation. Therefore, market deregulation, per se, does not guarantee the emergence of an integrated interbank market. The effect of a repo market which, a priori, was supposed to improve efficiency happens to be more complex: it reduces interest rate spreads and improves upon the segmentation equilibrium, but\ it may destroy the unsecured integrated equilibrium, since the repo market will attract the best borrowers. The introduction of other transnational institutional arrangements, such as multinational banking, correspondent banking and the existence of "too-big-to-fail" banks may reduce cross country interest spreads and provide more insurance against country wide liquidity shocks. Still, multinational banking, as the introduction of repos, may threaten the integrated interbank market equilibrium.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 579.
Date of creation: Mar 2001
Date of revision:
Contact details of provider:
Web page: http://www.econ.upf.edu/
Banking theory; asymmetric information; financial integration; interbank markets; diamond-dybvig;
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.
- Freixas, Xavier & Holthausen, Cornelia, 2001. "Interbank market integration under asymmetric information," Working Paper Series 0074, European Central Bank.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-11-27 (All new papers)
- NEP-ENT-2001-11-27 (Entrepreneurship)
- NEP-FMK-2001-11-27 (Financial Markets)
- NEP-NET-2001-11-27 (Network Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bhattacharya, Sudipto & Fulghieri, Paolo, 1994. "Uncertain liquidity and interbank contracting," Economics Letters, Elsevier, vol. 44(3), pages 287-294.
- Xavier Freixas & Bruno M. Parigi & Jean-Charles Rochet, 2000.
"Systemic risk, interbank relations, and liquidity provision by the central bank,"
Federal Reserve Bank of Cleveland, pages 611-640.
- Freixas, Xavier & Parigi, Bruno M & Rochet, Jean-Charles, 2000. "Systemic Risk, Interbank Relations, and Liquidity Provision by the Central Bank," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 611-38, August.
- Xavier Freixas & Bruno Parigi & Jean Charles Rochet, 1998. "Systemic risk, interbank relations and liquidity provision by the Central Bank," Economics Working Papers 440, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 1999.
- Freixas, Xavier & Parigi, Bruno & Rochet, Jean Charles, 1999. "Systemic Risk, Interbank Relations and Liquidity Provision by the Central Bank," CEPR Discussion Papers 2325, C.E.P.R. Discussion Papers.
- X. Freixas & B. Parigi & J-C. Rochet, 2000. "Systemic Risk, Interbank Relations and Liquidity Provision by theCentral Bank," DNB Staff Reports (discontinued) 47, Netherlands Central Bank.
- Douglas W. Diamond & Philip H. Dybvig, 2000.
"Bank runs, deposit insurance, and liquidity,"
Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
- Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June.
- Mark J. Flannery, 1996.
"Financial crises, payment system problems, and discount window lending,"
Board of Governors of the Federal Reserve System (U.S.), pages 804-831.
- Flannery, Mark J, 1996. "Financial Crises, Payment System Problems, and Discount Window Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 804-24, November.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.