Home Bias in Interbank Lending and Banks’ Resolution Regimes
Bank of Italy
July 12, 2011
Bank of Italy Temi di Discussione (Working Paper) No. 816
In recent years, banks have become increasingly aware of the credit risk borne in lending in the interbank market and they select their counter-parties accordingly. They may also fear that if they come across a bad borrower, rescue plans will be skewed towards domestic creditors; moreover, lenders may prefer to defend their rights in their own regulatory and legal jurisdiction. Using 2004-09 data, this paper argues that these elements, the “resolution edge” of the domestic creditor, contributed to the increase in the home bias of interbank lending by euro-area banks from mid-2007 on, while a more consistent downward pattern emerges in the home bias of banks from five non-euro-area countries (including the US and the UK). The intuition is that when the crisis broke out, euro-area banks reckoned that within-the-area cross-border interbank loans carried a distinct risk compared with domestic loans. By contrast, a large Swiss bank, for example, did not need to wait until 2007 to gauge that its business in New York was a very different matter from a deal in Zürich.
Number of Pages in PDF File: 45
Keywords: home bias, interbank market, euro area, banks resolution procedures
JEL Classification: C33, G11, G15, G21, K20working papers series
Date posted: November 17, 2011
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