Interbank Market Integration Under Asymmetric Information

By Xavier Freixas, Cornelia Holthausen. Social Science Research Network, 2005

251 citations recorded by the source corpus.

We argue that the main barrier to an integrated international interbank market is the existence of asymmetric information between different countries, which may prevail in spite of monetary integration or successful currency pegging. In order to address this issue, we study the scope for international interbank market integration with unsecured lending when cross-country information is noisy. We find not only that an equilibrium with integrated markets need not always exist, but also that when it does, the integrated equilibrium may coexist with one of interbank market segmentation. Therefore, market deregulation, per se, does not guarantee the emergence of an integrated interbank market. The effect of a repo market which, a priori, was supposed to improve efficiency happens to be more complex: it reduces interest rate spreads and improves upon the segmentation equilibrium, but\ it may destroy the unsecured integrated equilibrium, since the repo market will attract the best borrowers. 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.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/1416fd4bf28f0958263348864f176f0f6563e459

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Citations in the corpus

The Role of Interbank Markets in Monetary Policy: A Model with Rationing (2008, unknown): “Keywords: Banking, Rationing, Monetary Policy.”
Mapping the UK interbank system. (2014, background): “They argue that Belgian banks had more cross-border transactions after the introduction of the euro, and only large banks with a good international reputation could act as correspondents for smaller banks that could not overcome the problem of asymmetric information (Freixas and Holthausen, 2005).”
Lending relationships in the interbank market (2003, unknown): “Freixas and Holthausen (2005) solve such a model in an international setting, when cross-country information is noisy.”
Liquidity Hoarding and Interbank Market Spreads: The Role of Counterparty Risk (2009, background): “The macroeconomic implications of frictions in interbank markets are explored in Freixas, Parigi, and Rochet (2000), Freixas and Holthausen (2005), Freixas and Jorge (2008) and Bruche and Suarez (2010).”
Liquidity (Risk) Concepts: Definitions and Interactions (2009, unknown): “Several papers in the literature focus on the role of peer monitoring in interbank markets (see Rochet and Tirole (1996) and Freixas and Holthausen (2005) for theoretical models based on this assumption, and Fur…ne (2001) for empirical analysis in support of the assumption).”
Do Foreign-Owned Banks Affect Banking System Liquidity Risk? (2009, unknown): “In particular, if as modeled by Freixas and Holthausen (2005), subsidiaries of transnational banks can access liquidity in both the host banking system and abroad, foreign banks should be less concerned about liquidity shocks and would hold lower volumes of liquid assets compared to domestic banks.”
Interbank Tiering and Money Center Banks (2010, unknown): “Freixas et al. (2000) provide an example of such a case, obtained by assuming that all travelers pass through a single location.”
Cross-Border Interbank Networks, Banking Risk and Contagion (2015, background): “Gai and Kapadia (2010) adopt a similar approach and develop a network model in which agents are linked by financial claims on each other.”
Too Interconnected to Fail: A Survey of the Interbank Networks Literature (2015, background): “Freixas et al. (2000) find that the central bank has a role to play as a crisis manager.”
Imperfect Competition in the Interbank Market for Liquidity as aRationale for Central Banking (2009, unknown): “This section discusses some of the private arrangements amongst banks to manage liquidity shocks before the modern central banking era, as well as the role of strategic behavior in their failure, as witnessed during significant historical episodes (see Freixas et al. (1999) for a survey).”