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Central bank standing facilities, counterparty risk, and OTC-interbank lending

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  • Vollmer, Uwe
  • Wiese, Harald

Abstract

The paper asks how changes in monetary policy interest rates influence the functioning of uncollateralized interbank markets if banks are subject to counterparty risk. We concentrate on the central bank's marginal lending and deposit facilities. Since interbank trades are usually over-the-counter transactions, we use a bilateral bargaining model and apply the Nash bargaining solution. We determine the threat points and the bargaining frontier of debtor banks and creditor banks in the interbank markets. We show that a decrease in the central bank's marginal lending rate always reduces the probability for reaching a bargaining solution. In contrast, the chances that the banks agree on an interbank loan can both decrease or increase following a reduction in the deposit rate.

Suggested Citation

  • Vollmer, Uwe & Wiese, Harald, 2016. "Central bank standing facilities, counterparty risk, and OTC-interbank lending," The North American Journal of Economics and Finance, Elsevier, vol. 36(C), pages 101-122.
    • Handle: RePEc:eee:ecofin:v:36:y:2016:i:c:p:101-122
    DOI: 10.1016/j.najef.2015.12.003
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    2. Hao Dong & Yingrong Zheng & Na Li, 2023. "Analysis of Systemic Risk Scenarios and Stabilization Effect of Monetary Policy under the COVID-19 Shock and Pharmaceutical Economic Recession," Sustainability, MDPI, vol. 15(1), pages 1-32, January.
    3. Maria Näther, 2019. "The effect of the central bank’s standing facilities on interbank lending and bank liquidity holding," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 68(3), pages 537-577, October.
    4. Monika Bucher & Achim Hauck & Ulrike Neyer, 2020. "Interbank market friction-induced holdings of precautionary liquidity: implications for bank loan supply and monetary policy implementation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 70(1), pages 165-222, July.

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