How Stressed are Banks in the Interbank Market?
30 Pages Posted: 21 Jun 2016
Date Written: 2013
We use a unique data set that comprises each bank's bids in the Eurosystem's main refinancing operations and its recourse to the LOLR facility (a) to derive banks' willingness-to-pay for liquidity through a one-week repo and (b) to show that a bank's willingness-to-pay is a good indicator for the probability that this bank draws on the LOLR facility. Our results suggest (i) that banks' willingness-to-pay for liquidity indeed reflects refinancing conditions in the interbank market and (ii) that the willingness-to-pay can serve as an early warning indicator for banking distress.
Keywords: banks, liquidity, LOLR facility, repos, money markets, frictions
JEL Classification: D44, E42, E58, G21
Suggested Citation: Suggested Citation