Abstract

https://ssrn.com/abstract=278247
 
 

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Interbank Market Integration Under Asymmetric Information


Xavier Freixas


Universitat Pompeu Fabra; Centre for Economic Policy Research (CEPR); Barcelona Graduate School of Economics (Barcelona GSE)

Cornelia Holthausen


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

July 2001

ECB Working Paper No. 74

Abstract:     
While domestic interbank markets are often considered to work in an efficient way, cross-country bank lending appears to be subject to market imperfections leading to persistent interest rate differentials. In a model where banks need to cope with liquidity shocks by borrowing or by liquidating assets, we study the scope for international interbank market integration with unsecured lending when cross-country information is noisy. We find that an equilibrium with integrated markets need not always exist, and that it coexists with one characterized by segmentation. A repo market reduces interest rate spreads and improves upon the segmentation equilibrium. However, it may destroy the unsecured integrated equilibrium, since it reduces the liquidity imbalances and thus the gains from unsecured market integration. The introduction of other transnational institutional arrangements, such as multinational banking, correspondent banking and the existence of "too-big-to-fail" banks may reduce cross country interest spreads and provide more insurance against country wide liquidity shocks. Still, multinational banking, as the introduction of repos, may threaten the integrated interbank market equilibrium.

Number of Pages in PDF File: 32

Keywords: Interbank lending, financial integration, interbank markets, multinational banks, Too-Big-To-Fail

JEL Classification: G15, G21, F36


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Date posted: August 16, 2001  

Suggested Citation

Freixas, Xavier and Holthausen, Cornelia, Interbank Market Integration Under Asymmetric Information (July 2001). ECB Working Paper No. 74. Available at SSRN: https://ssrn.com/abstract=278247

Contact Information

Xavier Freixas
Universitat Pompeu Fabra ( email )
Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
+34 93 542 2726 (Phone)
+34 93 542 1746 (Fax)
HOME PAGE: http://www.econ.upf.es/~freixas
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
HOME PAGE: http://www.econ.upf.es/~freixas/more/personal1.htm
Barcelona Graduate School of Economics (Barcelona GSE) ( email )
Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain
Cornelia Holthausen (Contact Author)
European Central Bank (ECB) ( email )
Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 6490 (Phone)
+49 69 1344 855 (Fax)

Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
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