Interbank market integration under asymmetric information

Xavier Freixas and Cornelia Holthausen

No 74, Working Paper Series from European Central Bank

Abstract: While domestic interbank markets are often considered to work in an efficient way, cross-country bank lending appears to be subjected to market imperfections leading to persistent interest rate differentials. In a model where banks need to cope with liquidity shocks by borrowing or by liquidating assets, we study the scope for international interbank market integration with unsecured lending when cross-country information is noisy. We find that an equilibrium with integrated markets need not always exist, and that it coexists with one characterized by segmentation. A repo market reduces interest rate spreads and improves upon the segmentation equilibrium. However, it may destroy the unsecured integrated equilibrium. JEL Classification: G15, G20, F36

Keywords: asymmetric information; Banking theory; financial integration; interbank markets (search for similar items in EconPapers)
Date: 2001-08
Note: 253388
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:200174

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