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Bank liquidity, interbank markets, and monetary policy

Freixas,X.
; 
Martin,A.
; 
Skeie,D.
Abstract
A lesson of the recent financial crisis is that the interbank market is crucial for banks facing uncertainty regarding their liquidity needs. This article studies the efficiency of the interbank market in allocating funds. We show that the central bank should lower the interbank rate when confronted with a crisis that causes a disparity in the liquidity held among banks. This suggests that the traditional tenet prescribing the separation between prudential regulation and monetary policy should be abandoned. We also show that failure to cut interest rates during a crisis erodes financial stability by increasing the risk of bank runs.
Description
Appeared earlier as CentER Discussion Paper 2010-035S
Date
2011
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Tilburg University Research Output Collection
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Keywords
SDG 10 - Reduced Inequalities, SDG 17 - Partnerships for the Goals
Citation
Freixas, X, Martin, A & Skeie, D 2011, 'Bank liquidity, interbank markets, and monetary policy', Review of Financial Studies, vol. 24, no. 8, pp. 2656-2692. https://doi.org/10.1093/rfs/hhr018
URI
https://hdl.handle.net/20.500.14602/56614
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