Interbank Lending, Credit-Risk Premia, and Collateral
by Florian Heider and Marie Hoerova
European Central Bank
We study the functioning of secured and unsecured interbank
markets in the presence of credit risk. The model generates
empirical predictions that are in line with developments
during the 2007–09 financial crisis. 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 Codes: G01, G21, E58.
(PDF, 39 pages 399 kb)
Discussion by Ernst-Ludwig von Thadden