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Interbank Lending, Credit-Risk Premia, and Collateral

Author

Listed:
  • Florian Heider

    (European Central Bank)

  • Marie Hoerova

    (European Central Bank)

Abstract

We study the functioning of secured and unsecured interbank markets in the presence of credit risk. The model generates empirical predictions that are in line with developments during the 2007–09 financial crisis. Interest rates decouple across secured and unsecured markets following an adverse shock to credit risk. The scarcity of underlying collateral may amplify the volatility of interest rates in secured markets. We use the model to discuss various policy responses to the crisis.

Suggested Citation

  • Florian Heider & Marie Hoerova, 2009. "Interbank Lending, Credit-Risk Premia, and Collateral," International Journal of Central Banking, International Journal of Central Banking, vol. 5(4), pages 5-43, December.
  • Handle: RePEc:ijc:ijcjou:y:2009:q:4:a:1
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    References listed on IDEAS

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    Cited by:

    1. Wolski, Marcin & van de Leur, Michiel, 2016. "Interbank loans, collateral and modern monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 388-416.
    2. Camilo González Sabogal, 2014. "Un mecanismo para lograr la participación de los bancos en los mercados interbancarios no colateralizados," Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 32(73), pages 17-35.
    3. repec:eee:jbfina:v:83:y:2017:i:c:p:232-248 is not listed on IDEAS
    4. Giovanni Lombardo & Peter McAdam, 2010. "Incorporating financial frictions into new-generation macro models," Research Bulletin, European Central Bank, vol. 9, pages 13-16.
    5. Agur, Itai, 2014. "Bank risk within and across equilibria," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 322-333.
    6. Marco Pagano, 2014. "Dealing with Financial Crises: How Much Help from Research?," CSEF Working Papers 361, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    7. Nyborg, Kjell G., 2017. "Central bank collateral frameworks," Journal of Banking & Finance, Elsevier, vol. 76(C), pages 198-214.
    8. Heider, Florian & Hoerova, Marie & Holthausen, Cornelia, 2009. "Liquidity hoarding and interbank market spreads: the role of counterparty risk," Working Paper Series 1126, European Central Bank.
    9. Miguel Sarmiento & Jorge Cely & Carlos León, 2015. "Monitoring the Unsecured Interbank Funds Market," Borradores de Economia 917, Banco de la Republica de Colombia.
    10. Corradin, Stefano & Heider, Florian & Hoerova, Marie, 2017. "On collateral: implications for financial stability and monetary policy," Working Paper Series 2107, European Central Bank.
    11. Charles Kahn, 2013. "Private payment systems, collateral, and interest rates," Annals of Finance, Springer, vol. 9(1), pages 83-114, February.
    12. Marzo, Massimiliano & Zagaglia, Paolo, 2014. "Asymmetric information and term lending in the Euro money market: Evidence from the beginning of the turmoil," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(4), pages 487-499.
    13. Angela Maddaloni & José-Luis Peydró, 2010. "Bank lending standards and the origins and implications of the current banking crisis," Research Bulletin, European Central Bank, vol. 9, pages 6-9.
    14. Fiorella De Fiore & Oreste Tristani, 2010. "Financial conditions and monetary policy," Research Bulletin, European Central Bank, vol. 9, pages 10-12.
    15. Francesco Molteni, 2015. "Liquidity, Government Bonds and Sovereign Debt Crises," Working Papers 2015-32, CEPII research center.
    16. Li, Hui & Liu, Hong & Siganos, Antonios, 2016. "A comparison of the stock market reactions of convertible bond offerings between financial and non-financial institutions: Do they differ?," International Review of Financial Analysis, Elsevier, vol. 45(C), pages 356-366.
    17. Bertsch, Christoph, 2013. "A detrimental feedback loop: deleveraging and adverse selection," Working Paper Series 277, Sveriges Riksbank (Central Bank of Sweden).
    18. Sarmiento, Miguel & Cely, Jorge & León, Carlos, 2017. "An early warning indicator system to monitor the unsecured interbank funds market," Research in International Business and Finance, Elsevier, vol. 40(C), pages 114-128.
    19. Cornelia Holthausen & Huw Pill, 2010. "The forgotten markets: How understanding money markets helps us to understand the financial crisis," Research Bulletin, European Central Bank, vol. 9, pages 2-5.

    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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