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Interbank lending, credit risk premia and collateral

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  • Heider, Florian
  • Hoerova, Marie

Abstract

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

Suggested Citation

  • Heider, Florian & Hoerova, Marie, 2009. "Interbank lending, credit risk premia and collateral," Working Paper Series 1107, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20091107
    Note: 276127
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    More about this item

    Keywords

    collateral; credit risk; financial crisis; interbank market; liquidity;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • 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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