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Interbank Lending, Credit Risk Premia and Collateral


Florian Heider


European Central Bank (ECB)

Marie Hoerova


European Central Bank (ECB)
July 26, 2009

International Journal of Central Banking, Vol. 5, pp. 1-39

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 2007-2009 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.

Number of Pages in PDF File: 37

Keywords: Financial crisis, Interbank market, Liquidity, Credit risk, Collateral

JEL Classification: G01, G21, E58

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Date posted: December 8, 2009  

Suggested Citation

Heider, Florian and Hoerova, Marie, Interbank Lending, Credit Risk Premia and Collateral (July 26, 2009). International Journal of Central Banking, Vol. 5, pp. 1-39. Available at SSRN: http://ssrn.com/abstract=1520393

Contact Information

Florian Heider (Contact Author)
European Central Bank (ECB) ( email )
Kaiserstrasse 29
Frankfurt am Main, D-60311
Germany
Marie Hoerova
European Central Bank (ECB) ( email )
Kaiserstrasse 29
Frankfurt am Main, D-60311
Germany
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