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

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  • Henri Bernard
  • Joseph Bisignano

Abstract

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.

Suggested Citation

  • Henri Bernard & Joseph Bisignano, 2000. "Information, liquidity and risk in the international interbank market: implicit guarantees and private credit market failure," BIS Working Papers 86, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:86
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    Cited by:

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    2. Edgardo Barandiarán, 2000. "Chile Después del Peso: Viviendo con el Dólar," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 37(110), pages 241-267.
    3. Sébastien Vivier-Lirimont, 2004. "Interbanking networks: towards a small financial world?," Cahiers de la Maison des Sciences Economiques v04046, Université Panthéon-Sorbonne (Paris 1).
    4. Bank for International Settlements, 2001. "Collateral in wholesale financial markets: recent trends, risk management and market dynamics," CGFS Papers, Bank for International Settlements, number 17, december.
    5. Spadafora, Francesco, 2003. "Official bailouts, moral hazard and the 'speciality' of the international interbank market," Emerging Markets Review, Elsevier, vol. 4(2), pages 165-196, June.
    6. Garratt, Rodney J. & Mahadeva, Lavan & Svirydzenka, Katsiaryna, 2014. "The great entanglement: The contagious capacity of the international banking network just before the 2008 crisis," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 367-385.
    7. Eric Santor, 2003. "Crisis bancarias y contagio: evidencia empírica," Monetaria, CEMLA, vol. 0(3), pages 293-344, julio-sep.
    8. Garratt, Rodney & Mahadeva, Lavan & Svirydzenka, Katsiaryna, 2011. "The contagious capacity of the international banking network: 1985-2009," University of California at Santa Barbara, Economics Working Paper Series qt0r89f16p, Department of Economics, UC Santa Barbara.
    9. Jiranyakul, Komain & Opiela, Timothy, 2014. "Market Discipline at Thai Banks before the Asian Crisis," MPRA Paper 54492, University Library of Munich, Germany.
    10. Grégory Nguyen, 2003. "The Belgian Interbank Market: Interbank Linkages and Systemic Risk," Financial Stability Review, National Bank of Belgium, vol. 1(1), pages 105-123, June.
    11. Morteza Alaeddini & Philippe Madiès & Paul J. Reaidy & Julie Dugdale, 2023. "Interbank money market concerns and actors’ strategies—A systematic review of 21st century literature," Journal of Economic Surveys, Wiley Blackwell, vol. 37(2), pages 573-654, April.
    12. Bank for International Settlements, 2003. "Guide to the international financial statistics," BIS Papers, Bank for International Settlements, number 14.
    13. Eric Santor, 2003. "Banking Crises and Contagion: Empirical Evidence," Staff Working Papers 03-1, Bank of Canada.

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