Interbank Lending Rate Research Articles

Do Central Bank Liquidity Facilities Affect Interbank Lending Rates?

In response to the severe global credit market dislocations that started in August 2007, central banks around the world injected extraordinary amounts of liquidity into the financial system. Using an empirical arbitrage-free term structure model, we investigate the effectiveness of these actions in reducing dollar-denominated interbank lending rates. Our model accounts for fluctuations in the nominal U.S. Treasury yield curve and in the term structure of risk in financial corporate bond yields and term interbank lending rates. Our estimates suggest that central bank liquidity facilities did help lower term interbank lending rates.

Crisis and Responses: The Federal Reserve in the Early Stages of the Financial Crisis

Realizing that their traditional instruments were inadequate for responding to the crisis that began on August 9, 2007, Federal Reserve officials improvised. Beginning in mid-December 2007, they implemented a series of changes directed at ensuring that liquidity would be distributed to those institutions that needed it most. Conceptually, this meant America's central bankers shifted from focusing solely on the size of their balance sheet, which they use to keep the overnight interbank lending rate close to their chosen target, to manipulating the composition of their assets as well. In this paper, I examine the Federal Reserve's conventional and unconventional responses to the financial crisis of 2007–2008.

The Impact of a New Term Auction Facility on LIBOR-OIS Spreads and Volatility Transmission between Money and Mortgage Markets During the Subprime Crisis

During the subprime crisis, the U.S. Federal Reserve has been concerned about widening spreads between the overnight inter-bank lending rate such as the overnight index swap (OIS) and term London Inter-Bank Offer Rates (LIBOR). Among the tools it has used to counter the impact of the crisis, the innovative Term Auction Facility (TAF) has attracted a lot of attention. We investigate the impact of TAF on the LIBOR-OIS spread. We find that TAF has a clear initial effect on the three-month LIBOR-OIS spread but no sustained effect. In addition, TAF has no effect on the one-month LIBOR-OIS spread, casting further doubt in the usefulness of TAF on reducing risk spreads. Since the subprime crisis has also spilled across the interbank, commercial paper and jumbo mortgage markets, we further examine the lead-lag relationship among LIBOR-OIS, commercial paper and jumbo spreads and the volatility transmission effect among them. For the period before the crisis, we find that the three markets behave independently and do not influence each other. For the subprime crisis period, however, we find that multi-directional lead-lag relationships among these markets and time-varying volatilities across the three markets are significantly correlated.

A Black Swan in the Money Market

At the center of the financial market crisis of 2007-2008 was a highly unusual jump in spreads between the overnight inter-bank lending rate and term London inter-bank offer rates (Libor). Because many private loans are linked to Libor rates, the sharp increase in these spreads raised the cost of borrowing and interfered with monetary policy. The widening spreads became a major focus of the Federal Reserve, which took several actions--including the introduction of a new term auction facility (TAF)--to reduce them. This paper documents these developments and, using a no-arbitrage model of the term structure, tests various explanations, including increased risk and greater liquidity demands, while controlling for expectations of future interest rates. We show that increased counterparty risk between banks contributed to the rise in spreads and find no empirical evidence that the TAF has reduced spreads. The results have implications for monetary policy and financial economics.

A Post-Keynesian View of Central Bank Independence, Policy Targets, and the Rules-Versus-Discretion Debate

This paper addresses three issues surrounding monetary policy formation: policy independence, choice of operating targets, and rules versus discretion. According to the New Monetary Consensus, the central bank needs policy independence to build credibility; the operating target is the overnight interbank lending rate, and the ultimate goal is price stability. This paper provides an alternative view, arguing that an effective central bank cannot be independent as conventionally defined, where effectiveness is indicated by ability to hit an overnight nominal interest rate target. Discretionary policy is rejected, as are conventional views of the central bank's ability to achieve traditional goals such as robust growth, low inflation, and high employment. Thus, the paper returns to Keynes's call for low interest rates and euthanasia of the rentier.

Systemic risk in the major Eurobanking markets: Evidence from inter-bank offered rates

In Eurobanking, the London Interbank Offered Rate is often assumed to be the reference rate for Eurocurrency loan transactions. A debate continues as to whether or not dominance by London is evident through the movements in interbank offered rates and whether any adverse shocks experienced there are felt through the other major Eurobanking centres of New York and Tokyo. This study finds that in the longer-term New York is the driver of both the London and the Tokyo interbank lending rates. The more important issue is that the interbank offered rates in London, New York and Tokyo show a long-term cointegrating relationship. Whilst Western banking is incestuous in terms of interbank lines of credit, support is nevertheless provided for rational expectations and market efficiency. However, cointegration also constitutes interdependence and in turn shows evidence of systemic risk (the threat of contagion) in these centres is provided. The implications for future research into global financial stability are alluded to in the conclusion.

Avaliação de Desempenho e Market Timing: O Índice de Habilidade

MERTON [1981] formaliza a análise da criação de valor por gestores no contexto geral de seleção entre ações e títulos de renda fixa através de market timing. Partindo dos fundamentos conceituais por ele desenvolvidos, HENRIKSON e MERTON [1981] prosseguem para definir testes gerais de avaliação de desempenho de gestores e fundos no contexto de seleção por market timing. BRITO, BONA E TACIRO [2003] generalizam as análises de MERTON [1981] e HENRIKSON & MERTON [1981] para o caso de fundos de gestão ativa com uma carteira benchmark passiva claramente definida. Neste contexto generalizado de gestão ativa, um novo índice específico – o Índice de Habilidade de Brito (IHB) – é proposto para a avaliação de desempenho e de eficiência em market timing de fundos de gestão ativa. Este trabalho prossegue, então, para avaliar o desempenho e a eficiência de market timing do segmento de fundos derivativos no Brasil no passado recente utilizando o IHB. Uma amostra de 32 fundos representativos do segmento de derivativos com uma janela de 90 dias úteis com cotações disponíveis em 31/10/1999 foi levantada para testes empíricos de avaliação de desempenho pelo IHB, adotando-se aplicações no CDI como carteira benchmark passiva. Os resultados obtidos indicam a significância ao nível de 5% dos IHB’s de dez fundos da amostra. Destes fundos, sete apresentam também significância ao nível de 1%. Em síntese, os resultados indicam uma predominância de gestores com capacidade de previsão e IHB’s não significantes no segmento de fundos derivativos no Brasil, no período examinado. Poucos gestores apresentam evidência empírica de capacidade de previsão significante.

Systemic Risk in the Major Eurobanking Markets: Evidence from Interbank Offered Rates

In Eurobanking, the London Interbank Offered Rate is often assumed to be the reference rate for Eurocurrency loan transactions. A debate continues as to whether or not dominance by London is evident through the movements in interbank offered rates and whether any adverse shocks experienced there are felt through the other major Eurobanking centres of New York and Tokyo. This study finds that in the longer-term New York is the driver of both the London and the Tokyo interbank lending rates. The more important issue is that the interbank offered rates in London, New York and Tokyo show a long-term cointegrating relationship. Whilst Western banking is incestuous in terms of interbank lines of credit, support is nevertheless provided for rational expectations and market efficiency. However, cointegration also constitutes interdependence and in turn shows evidence of systemic risk (the threat of contagion) in these centres is provided. The implications for future research into global financial stability are alluded to in the conclusion.

A Note on Intermediation in the Eurodollar Market

intermediation1 and multiple credit creation2-have their own respective constraints: interbank deposit reserve ratio and lending rate ceiling for intermediation and reserve against external deposit in multiple credit creation. But the existing theoretical models of intermediation [2, 342; 5, 41] take into account only interbank reserve ratio while ignoring interest rate as a constraint. This failure to incorporate the interest rate into the model apparently stems from too closely applying the fractional reserve banking analogy to intermediation. In fractional reserve banking, deposit increases by the reciprocal of the reserve ratio and additional credit expands by a multiple equal to one less than the deposit multiplier. But this is not the case in intermediation. In