Interbank lending, credit risk premia and collateral

Florian Heider and Marie Hoerova

No 1107, Working Paper Series from European Central Bank

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

Keywords: collateral; credit risk; financial crisis; interbank market; liquidity (search for similar items in EconPapers)
Date: 2009-11
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mon and nep-rmg
Note: 276127
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Citations: View citations in EconPapers (35)

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Related works:
Journal Article: Interbank Lending, Credit-Risk Premia, and Collateral (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20091107

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