Bank Liquidity, Interbank Markets, and Monetary Policy

Xavier Freixas (), Antoine Martin and David Skeie

The Review of Financial Studies, 2011, vol. 24, issue 8, 2656-2692

Abstract: A lesson of the recent financial crisis is that the interbank market is crucial for banks facing uncertainty regarding their liquidity needs. This article studies the efficiency of the interbank market in allocating funds. We show that the central bank should lower the interbank rate when confronted with a crisis that causes a disparity in the liquidity held among banks. This suggests that the traditional tenet prescribing the separation between prudential regulation and monetary policy should be abandoned. We also show that failure to cut interest rates during a crisis erodes financial stability by increasing the risk of bank runs. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Date: 2011
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Related works:
Working Paper: Bank Liquidity, Interbank Markets and Monetary Policy (2015)
Working Paper: Bank Liquidity, Interbank Markets, and Monetary Policy (2010)
Working Paper: Bank Liquidity, Interbank Markets, and Monetary Policy (2010)
Working Paper: Bank Liquidity, Interbank Markets, and Monetary Policy (2010)
Working Paper: Bank liquidity, interbank markets and monetary policy (2010)
Working Paper: Bank liquidity, interbank markets, and monetary policy (2009)
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