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Interbank lending, credit risk premia and collateral

  • Heider, Florian
  • Hoerova, Marie

We study the functioning of secured and unsecured inter-bank markets in the presence of credit risk. The model generates empirical predictions that are in line with developments during the 2007-2009 financial crises. Interest rates decouple across secured and unsecured markets following an adverse shock to credit risk. The scarcity of underlying collateral may amplify the volatility of interest rates in secured markets. We use the model to discuss various policy responses to the crisis. JEL Classification: G01, G21, E58

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Paper provided by European Central Bank in its series Working Paper Series with number 1107.

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Date of creation: Nov 2009
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Handle: RePEc:ecb:ecbwps:20091107
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  1. Freixas, X. & Martin, A. & Skeie, D., 2010. "Bank Liquidity, Interbank Markets, and Monetary Policy," Discussion Paper 2010-35S, Tilburg University, Center for Economic Research.
  2. Emmanuel Farhi & Mikhail Golosov & Aleh Tsyvinski, 2007. "A Theory of Liquidity and Regulation of Financial Intermediation," NBER Working Papers 12959, National Bureau of Economic Research, Inc.
  3. Freixas, Xavier & Parigi, Bruno & Rochet, Jean-Charles, 1999. "Systemic Risk, Interbank Relations and Liquidity Provision by the Central Bank," CEPR Discussion Papers 2325, C.E.P.R. Discussion Papers.
  4. Douglas W. Diamond & Raghuram G. Rajan, 1999. "Liquidity Risk, Liquidity Creation and Financial Fragility: A Theory of Banking," NBER Working Papers 7430, National Bureau of Economic Research, Inc.
  5. Freixas, X. & Holthausen, C., 2001. "Interbank Market Integration under Asymmetric Information," Papers 74, Quebec a Montreal - Recherche en gestion.
  6. Heider, Florian & Hoerova, Marie & Holthausen, Cornelia, 2010. "Liquidity Hoarding and Interbank Market Spreads: The Role of Counterparty Risk," CEPR Discussion Papers 7762, C.E.P.R. Discussion Papers.
  7. Lasse Heje Pederson & Markus K Brunnermeier, 2007. "Market Liquidity and Funding Liquidity," FMG Discussion Papers dp580, Financial Markets Group.
  8. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  9. Viral V. Acharya & Hyun Song Shin & Tanju Yorulmazer, 2009. "Crisis Resolution and Bank Liquidity," NBER Working Papers 15567, National Bureau of Economic Research, Inc.
  10. Peter Hördahl & Michael R King, 2008. "Developments in repo markets during the financial turmoil," BIS Quarterly Review, Bank for International Settlements, December.
  11. John C. Williams & John B. Taylor, 2009. "A Black Swan in the Money Market," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 58-83, January.
  12. Bruche, Max & Suarez, Javier, 2009. "The Macroeconomics of Money Market Freezes," CEPR Discussion Papers 7304, C.E.P.R. Discussion Papers.
  13. James McAndrews & Asani Sarkar & Zhenyu Wang, 2008. "The effect of the Term Auction Facility on the London Inter-Bank Offered Rate," Staff Reports 335, Federal Reserve Bank of New York.
  14. Jens H. E. Christensen & Jose A. Lopez & Glenn D. Rudebusch, 2014. "Do Central Bank Liquidity Facilities Affect Interbank Lending Rates?," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 32(1), pages 136-151, January.
  15. Xavier Freixas & José Jorge, 2008. "The Role of Interbank Markets in Monetary Policy: A Model with Rationing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(6), pages 1151-1176, 09.
  16. repec:bla:restud:v:76:y:2009:i:3:p:973-992 is not listed on IDEAS
  17. Viral V. Acharya & Denis Gromb & Tanju Yorulmazer, 2012. "Imperfect Competition in the Interbank Market for Liquidity as a Rationale for Central Banking," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(2), pages 184-217, April.
  18. Franklin Allen & Elena Carletti & Douglas Gale, 2009. "Interbank Market Liquidity and Central Bank Intervention," Economics Working Papers ECO2009/09, European University Institute.
  19. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
  20. John B. Taylor, 2009. "The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong," NBER Working Papers 14631, National Bureau of Economic Research, Inc.
  21. Michael J. Fleming & Warren B. Hrung & Frank M. Keane, 2009. "The Term Securities Lending Facility: origin, design, and effects," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 15(Feb).
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