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Information, liquidity and risk in the international interbank market: implicit guarantees and private credit market failure

  • Henri Bernard
  • Joseph Bisignano
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    This paper considers the functioning of the international interbank market (IIBM), its contribution to the recent financial turbulence in Asia, and the policy issues presented by the existence of moral hazard and implicit guarantees of interbank liabilities. The paper provides statistical analysis to document the existence of contagion in the interbank market. While previous researchers had cautioned of the possibility of contagion in the IIBM, statistical support for its existence was relatively sparse. Within geographic regions, interbank market contagion appears much more prevalent within Asia than within Latin America. Between regions, the contagion appears to have been from Asia to Latin America. The paper discusses the possible role of implicit government guarantees of international interbank credit in contributing to inflows into emerging market countries, where significant information asymmetries made difficult the analysis of counterpart risk. It is argued that because of the serious informational problems in some segments of the international interbank system, the market is subject to potential disruption. The implicit guarantees given to risky borrowers in the IIBM can be thought of as a subsidy which helps to ensure the viability of the market. In principle, it is similar to a subsidy that is provided a market with extreme adverse selection problems. It can, however, also be a source of instability if not properly managed.

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    Paper provided by Bank for International Settlements in its series BIS Working Papers with number 86.

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    Length: 80 pages
    Date of creation: Mar 2000
    Date of revision:
    Handle: RePEc:bis:biswps:86
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    1. Salant, Stephen W, 1983. "The Vulnerability of Price Stabilization Schemes to Speculative Attack," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 1-38, February.
    2. Roberto Chang & Andres Velasco, 1998. "Financial Crises in Emerging Markets," NBER Working Papers 6606, National Bureau of Economic Research, Inc.
    3. Ilan Goldfajn & Taimur Baig, 1999. "Financial market contagion in the Asian crisis," Textos para discussão 400, Department of Economics PUC-Rio (Brazil).
    4. Takatoshi Ito, 2000. "Capital Flows in Asia," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 255-296 National Bureau of Economic Research, Inc.
    5. Michael P. Dooley, 1998. "A model of crises in emerging markets," International Finance Discussion Papers 630, Board of Governors of the Federal Reserve System (U.S.).
    6. Jaffee, Dwight M & Russell, Thomas, 1984. "Imperfect Information, Uncertainty, and Credit Rationing: A Reply," The Quarterly Journal of Economics, MIT Press, vol. 99(4), pages 869-72, November.
    7. Chang, R. & Velasco, A., 1998. "Financial Crises in Emerging Markets: A Canonical Model," Working Papers 98-21, C.V. Starr Center for Applied Economics, New York University.
    8. Fernandez-Arias, Eduardo & DEC, 1994. "The new wave of private capital inflows : push or pull?," Policy Research Working Paper Series 1312, The World Bank.
    9. Salant, Stephen W & Henderson, Dale W, 1978. "Market Anticipations of Government Policies and the Price of Gold," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 627-48, August.
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