The Functioning of the European Interbank Market During the 2007-2008 Financial Crisis

33 Pages Posted: 18 Dec 2009 Last revised: 25 Feb 2014

Date Written: March 30, 2011


This paper provides a detailed analysis of the functioning of the overnight (O/N) unsecured euro money market during the 2007-2008 financial crisis by looking at the time patterns of interest rates, market turnover and banks’ borrowing costs. The aim is to disentangle the impact of market events – since the outbreak of tensions in the summer of 2007 until the end of November 2008 – from seasonal patterns of market activity, movements determined by the Eurosystem’s operational framework, the impact of the ECB’s exceptional crisis-related interventions. The results show the important role, alongside market events, of the additional refinancing provided by the ECB and of credit institutions’ increased tendency to hoard surplus reserves rather than trading them in the secondary market. Higher counterparty credit risk and seasonal factors are important determinants of O/N rates and volumes; the exceptional provision of liquidity by the Eurosystem and the relevant changes to the operational framework have influenced banks’ incentives to trade liquidity in the market. The analysis of banks’ costs for uncollateralised loans provides evidence of the major role of bank reputation and, during the crisis, of a too-big-to-fail guarantee implicitly granted by the market to the banks with the highest volumes of business and of a retrenchment towards national trading counterparties.

Keywords: Interbank market, Financial crisis, Monetary policy implementation, Operational efficiency, Too-big-to-fail, European financial integration

JEL Classification: E58, G01, G21

Suggested Citation

Gabrieli, Silvia, The Functioning of the European Interbank Market During the 2007-2008 Financial Crisis (March 30, 2011). CEIS Working Paper No. 158. Available at SSRN: or

Silvia Gabrieli (Contact Author)

Banque de France ( email )

32 rue Croix des Petits Champs
Paris, 75001

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