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Norwegian interbank market’s response to changes in liquidity policy

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We investigate pricing and activity in the Norwegian unsecured overnight interbank market in response to a shift in the central bank's liquidity policy. In october 2011, to encourage interbank trading, banks were allotted quotas for their overnight deposits with remuneration at the key policy rate while that on overnight deposits beyond allotted quotas was set one percentage point lower. In addition, a target range for banks' total overnight deposits was introduced and supported by open market operations to counteract not only temporary liquidity shortfalls, but also surpluses. We document substantially higher interbank trading, lower interbank interest rates relative to the policy rate as well as lower interest rate volatility following the policy shift. Notably, while overnight interbank interest rates were generally above the key policy rate before the policy shift, they have been close to but generally below the key policy rate afterwards.

Suggested Citation

  • Q. Farooq Akram & Jon H. Findreng, 2017. "Norwegian interbank market’s response to changes in liquidity policy," Working Paper 2017/7, Norges Bank.
  • Handle: RePEc:bno:worpap:2017_07
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    File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2017/72017/
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    Keywords

    Overnight interbank market; liquidity policy; regime-switching models;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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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