The interbank market after August 2007: what has changed, and why?
The outbreak of the financial crisis coincided with a sharp increase of worldwide interbank interest rates. We analyze the micro and macroeconomic determinants of this phenomenon, finding that before August 2007 interbank rates were insensitive to borrower characteristics, whereas afterwards they became reactive to borrowersï¿½ creditworthiness. At the same time, conditions for large borrowers became relatively more favorable, both before and after the failure of Lehman Brothers. This suggests that banks have become more discerning in their lending, a welcome change, but that moral hazard considerations related to the ï¿½too big to failï¿½ argument should remain a main concern for central banks.
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- Heiko Hesse & Nathaniel Frank & Brenda GonzÃ¡lez-Hermosillo, 2008. "Transmission of Liquidity Shocks: Evidence from the 2007 Subprime Crisis," IMF Working Papers 08/200, International Monetary Fund.
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