Secured and Unsecured Interbank Markets: Monetary Policy, Substitution and the Cost of Collateral

Thibaut Piquard and Dilyara Salakhova

Working papers from Banque de France

Abstract: We study the substitution between secured and unsecured interbank markets. Banks are competitive and subject to reserve requirements in a corridor rate system with deposit and lending facilities. Banks face counterparty risk in the unsecured market and incur an opportunity cost to pledge collateral. The model provides insights on interest rates, trading volumes and substitution between the two markets. Using transaction data on the Euro money market, we provide new empirical findings that the model accounts for: (i) borrowing banks are active on both markets even when their collateral constraint is not binding, (ii) secured interest rates may fall below the deposit facility rate. We derive and empirically test predictions on how "conventional" and "unconventional" monetary policies impact interbank markets, depending on whether marketable collateral is purchased or not.

Keywords: : Monetary Policy; Interbank Markets; Secured and Unsecured Funding. (search for similar items in EconPapers)
JEL-codes: E42 E52 E58 G21 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2019
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:730

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