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Over-the-counter loans, adverse selection, and stigma in the interbank market

Author

Listed:
  • Huberto Ennis

    (Federal Reserve Bank of Richmond)

  • John Weinberg

    (Federal Reserve Bank of Richmond)

Abstract

We study a model of interbank credit where physical and informational frictions limit the opportunities for intertemporal trade among banks and outside investors. Banks obtain loans in an over-the-counter market (involving search, bilateral matching, and negotiations over the terms of the loan) and hold assets of heterogeneous quality that in turn determine their ability to repay those loans. When asset quality is not observable by outside investors, information about the actions taken by a bank in the loan market may influence prices in the asset market. In particular, under some conditions, borrowing from the central bank can be regarded as a negative signal about the quality of the borrower's assets and banks may be willing to borrow in the market at rates higher than the one offered by the central bank. (Copyright: Elsevier)

Suggested Citation

  • Huberto Ennis & John Weinberg, 2013. "Over-the-counter loans, adverse selection, and stigma in the interbank market," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(4), pages 601-616, October.
  • Handle: RePEc:red:issued:10-115
    DOI: 10.1016/j.red.2012.09.005
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    References listed on IDEAS

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    More about this item

    Keywords

    Discount window; Signaling; Search; Bargaining; Private information; Banking;

    JEL classification:

    • 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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