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Interbank Lending, Credit Risk Premia and Collateral

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

37 Pages Posted: 8 Dec 2009  

Florian Heider

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Marie Hoerova

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: July 26, 2009

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.

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

JEL Classification: G01, G21, E58

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: https://ssrn.com/abstract=1520393

Florian Heider (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

HOME PAGE: http://https://sites.google.com/site/florianheider2/

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Marie Hoerova

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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