Dissecting Interbank Risk

Abstract

This paper analyses interbank risk using the information content of basis swap (BS) spreads, floating-to-floating interest rate swaps whose payments are associated with euro deposit rates for alternative tenors. We propose an empirical model to decompose BS quotes into persistent and transitory components. To estimate both unobservable constituents of BS spreads, we solve a signal extraction problem using a particle filter. Our empirical findings show that changes in systemic risk are associated with regime shifts. Shocks to aggregate liquidity are also important for describing persistent changes in BS spreads. Sovereign risk and risk aversion are relevant factors explaining transitory fluctuations.

Keywords: Interbank risk, basis swap, systemic risk, liquidity, particle filter

JEL Classification: G01, G12, G15, G32