Paper #1202

Títol:

Bank liquidity, interbank markets and monetary policy

Autors:

Xavier Freixas, Antoine Martin i David Skeie

Data:

Febrer 2010

Resum:

A major lesson of the recent financial crisis is that the interbank lending market is crucial for banks facing large uncertainty regarding their liquidity needs. This paper studies the efficiency of the interbank lending market in allocating funds. We consider two different types of liquidity shocks leading to different implications for optimal policy by the central bank. We show that, when confronted with a distributional liquidity-shock crisis that causes a large disparity in the liquidity held among banks, the central bank should lower the interbank rate. This view implies that the traditional tenet prescribing the separation between prudential regulation and monetary policy should be abandoned. In addition, we show that, during an aggregate liquidity crisis, central banks should manage the aggregate volume of liquidity. Two different instruments, interest rates and liquidity injection, are therefore required to cope with the two different types of liquidity shocks. Finally, we show that failure to cut interest rates during a crisis erodes financial stability by increasing the risk of bank runs.

Paraules clau:

Bank liquidity, interbank markets, central bank policy, financial fragility, bank runs.

Codis JEL:

G21, E43, E44, E52, E58

Àrea de Recerca:

Finances i Comptabilitat

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