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The role of counterparty risk and asymmetric information in the interbank market

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  • Cappelletti, Giuseppe
  • Guazzarotti, Giovanni

Abstract

We study the effect of counterparty risk on the ability of Italian banks to access the foreign unsecured interbank market during the sovereign debt crisis in the second half of 2011. With the onset of the crisis, interest rates in the Italian interbank market soared and foreign lending decreased significantly. To isolate the effect of the rise in counterparty risk, we compare the funding of Italian banks with that of foreign banks’ branches and subsidiaries in Italy, which were presumably unaffected by the sovereign crisis insofar as they could count on the actual or potential support of their parent bank. We find that the rise in counterparty risk substantially decreased the probability of obtaining funds from foreign banks. When the analysis is restricted to Italian and foreign banks with relatively comparable asset compositions, the result holds. In addition, where safer banks or more stable lending relationships are involved the effect is attenuated. JEL Classification: G21, G28, C23, C24

Suggested Citation

  • Cappelletti, Giuseppe & Guazzarotti, Giovanni, 2017. "The role of counterparty risk and asymmetric information in the interbank market," Working Paper Series 2022, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20172022
    Note: 2772546
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp2022.en.pdf
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    References listed on IDEAS

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    Cited by:

    1. Massimiliano Affinito & Matteo Piazza, 2021. "Always Look on the Bright Side? Central Counterparties and Interbank Markets during the Financial Crisis," International Journal of Central Banking, International Journal of Central Banking, vol. 17(1), pages 231-283, March.
    2. Cappelletti, Giuseppe & Mistrulli, Paolo Emilio, 2017. "Multiple lending, credit lines and financial contagion," Working Paper Series 2089, European Central Bank.

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    More about this item

    Keywords

    counterparty risk; financial crisis; interbank market;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models

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