Financial Crises, Payment System Problems, and Discount Window Lending

Flannery, Mark J.; Kaufman, George G.

doi:10.2307/2077922

Cited by 244 publications

(159 citation statements)

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“…Counterparty risk is studied, for example in Flannery (1996), Freixas and Jorge (2008), Bruche and Suarez (2010), and Philippon and Skreta (2012). In a model more directly applicable to our findings, Heider et al (2010) show that during times of large asymmetric information banks anticipate a dry-up of interbank lending and start hoarding liquidity as a result.…”

mentioning

confidence: 65%

A Network View on Interbank Market Freezes

Gabrieli

Georg

2014

SSRN Journal

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We study the liquidity allocation among European banks around the Lehman insolvency using a novel dataset of all interbank loans settled via the Eurosystem's payment system TARGET2. Following the Lehman insolvency, lenders in the overnight segment become sensitive to counterparty characteristics and banks start hoarding liquidity by shortening the maturity of their interbank lending. This aggregate change in liquidity reallocation is accompanied by a substantial structural change that can best be characterized as a shrinking of the interbank network. Such a change in the network structure is consequential: banks with higher centrality within the network have better access to liquidity and are able to charge larger intermediation spreads. Therefore, we show the existence of a sizeable interbank lending channel.

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confidence: 65%

A Network View on Interbank Market Freezes

Gabrieli

Georg

2014

SSRN Journal

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“…Continuing its LOLR role, the Fed provided a liquidity backstop to money market mutual funds (MMMF) and to CP borrowers. The Fed developed 12 Flannery (1996) also studies asymmetric information problems and identifies a "winner's curse" problem facing new lenders in banking markets (see footnote 2). There is a vast literature on central bank or government intervention to address market failures in the face of asymmetric information, moral hazard, and monopoly power.…”

Section: The Fed's Stage 2 Programsmentioning

confidence: 99%

Liquidity risk, credit risk, and the federal reserve’s responses to the crisis

Sarkar

2009

Financ Mark Portf Manag

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In responding to the severity and broad scope of the crisis, the Federal Reserve (the Fed) has aggressively utilized both traditional monetary policy instruments, as well as innovative tools to provide liquidity. In this paper, the Fed's actions are examined in light of the evolution of risk during the crisis. The empirical evidence supports the Fed's views on the primacy of liquidity constraints in the earlier stages of the crisis and the increased prominence of counterparty credit risk as the crisis evolved in 2008. I conclude that an understanding of the prevailing risk environment is necessary to evaluate when central bank programs are likely to be effective and under what conditions the programs might cease to be necessary.

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“…Besides the fact that not all banks might dispose of sufficient collateral to fund their entire liquidity needs through collateralized transactions with the central banks, the main argument for a decentralized interbank market usually put forward is that it ensures peer monitoring (see, for instance, Flannery (1996) and Rochet and Tirole (1996)). Banks are assumed to be in a better position to gather and process information about their peers and if this private information is reflected in interbank credit conditions it leads to a superior allocation of funds in the banking sector.…”

Section: Introductionmentioning

confidence: 99%

Relationship Lending in the Interbank Market and the Price of Liquidity

Bräuning

Fecht

2016

Review of Finance

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This paper empirically investigates the effect of interbank relationship lending on banks' access to liquidity. Our analysis is based on German interbank payment data which we use to create a panel of unsecured overnight loans between 1079 distinct borrower-lender pairs. The data shows that banks rely on repeated interactions with the same counterparties to trade liquidity. For the price of liquidity, we find that in the run-up to the recent financial crisis of 2007/08 relationship lenders charged already higher interest rates to their borrowers after controlling for other bank specific characteristics and general market conditions. By contrast, during the crisis borrowers paid on average lower rates to their relationship lenders compared to spot lenders. The observed interest rate differences are statistically and economically significant and in line with theory that relationship lenders have private information about the creditworthiness of their close borrowers.

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Financial Crises, Payment System Problems, and Discount Window Lending

Cited by 244 publications

References 0 publications

A Network View on Interbank Market Freezes

A Network View on Interbank Market Freezes

Liquidity risk, credit risk, and the federal reserve’s responses to the crisis

Relationship Lending in the Interbank Market and the Price of Liquidity

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