Interbank Market Integration under Asymmetric Information
Cross-country bank lending appears to be subject to market imperfections leading to persistent interest rate differentials. In a model where banks need to cope with liquidity shocks by borrowing or by liquidating assets, we study the scope for international interbank market integration with unsecured lending when cross-country information is noisy. We find that an equilibrium with integrated markets need not always exist, and that it may coexist with one characterized by segmentation. A repo market reduces interest rate spreads and improves upon the segmentation equilibrium. However, it may destroy the unsecured integrated equilibrium. Copyright 2005, Oxford University Press.
Year of publication: |
2005
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Authors: | Freixas, Xavier |
Published in: |
Review of Financial Studies. - Society for Financial Studies - SFS. - Vol. 18.2005, 2, p. 459-490
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Publisher: |
Society for Financial Studies - SFS |
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