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Stressed interbank markets: evidence from the European financial and sovereign debt crisis

Florian Heider, Carlos Garcia-de-Andoain (), Juan Carlos Frutos de Andres and Patrick Papsdorf

No 1925, Working Paper Series from European Central Bank

Abstract: This paper documents stress in the unsecured overnight interbank market in the euro area over the course of the financial and sovereign debt crisis in Europe. We find that stress i) leads some banks to borrow in the market at rates that are higher than the rate of the marginal lending facility of the ECB, ii) leads to less cross-border transactions and contributes to the fragmentation of the euro area money market. A triple-difference estimate shows that the borrowing of banks in the periphery from banks in the core almost disappears in the second half of 2011. Domestic borrowing, however, replaces the loss of cross-border borrowing. Our findings document the severe malfunctioning of the market for liquidity caused by asymmetric information problems in crisis times. We exploit euro area payments data to construct a novel dataset of interbank lending and borrowing. We verify the validity of our approach using the post-trading structure MID, maintained at Banco de Espa JEL Classification: G01, G21, E58, F36

Keywords: European sovereign debt crisis; financial crisis; Furfine algorithm; interbank markets; payment systems (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-eec, nep-ger and nep-mon
Date: 2016-06
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