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December 2009 issue
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Gale, Repullo, Schuermann, Smets
Heider, Hoerova
von Thadden
Kharroubi, Vidon
Santos
Misina, Tkacz
Claessens
Adrian, Shin
Chu, Lehnert, Passmore
Carlin
Pedersen
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Interbank Lending, Credit-Risk Premia, and Collateral

by Florian Heider and Marie Hoerova
European Central Bank

Abstract

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 200709 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.

 
Full article (PDF, 39 pages 399 kb)

Discussion by Ernst-Ludwig von Thadden