Interbank Rate Uncertainty and Bank Lending
33 Pages Posted: 23 Aug 2019
Date Written: August, 2019
This paper investigates the effects of interbank rate uncertainty on lending rates to euro area firms. We introduce a novel measure of interbank rate uncertainty, computed as the cross-sectional dispersion in interbank market rates on overnight unsecured loans. Using proprietary bank-level data, we find that interbank rate uncertainty significantly raises lending rates on loans to firms, with a peak effect of around 100 basis points during the 2007-2009 global financial crisis and the 2010-2012 European sovereign crisis. This effect is attenuated for banks with lower credit risk, sounder capital positions and greater access to central bank funding.
Keywords: bank lending, interbank market, uncertainty
JEL Classification: E44, D80, G21
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