Liquidity and credit risks in the UK’s financial crisis

Woon Wong, Iris Biefang-Frisancho, Wanru Yao and Peter Howells ()
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Woon Wong: University of the West of England, Bristol
Wanru Yao: University of the West of England, Bristol
Peter Howells: University of the West of England, Bristol

Working Papers from Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol

Abstract: This paper investigates the relationship between credit risk and liquidity components in the interbank spread and how this relationship unfolded during the recent financial crisis. We find that prior to the central bank’s Bank of England’s intervention counterpart risk was a major factor in the widening of the spread and also caused a rise in liquidity risk. However, this relationship was reversed after central bank started quantitative easing (QE). Using the accumulated value of asset purchases as a proxy for central bank’s liquidity provisions, we provide evidence that the QE operations were successful in reducing liquidity premia and ultimately, indirectly, credit risk.

Keywords: interbank spreads; liquidity premia; credit risk; quantitative easing; financial crisis (search for similar items in EconPapers)
Date: 2013-01-01
New Economics Papers: this item is included in nep-ban, nep-mon and nep-pke
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Persistent link: https://EconPapers.repec.org/RePEc:uwe:wpaper:20131301

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