A model of credit risk in interbank markets with interest rate spreads

Weltewitz, Florian. (2009). A model of credit risk in interbank markets with interest rate spreads Honours Thesis, School of Economics, The University of Queensland.

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Author Weltewitz, Florian.
Thesis Title A model of credit risk in interbank markets with interest rate spreads
School, Centre or Institute School of Economics
Institution The University of Queensland
Publication date 2009
Thesis type Honours Thesis
Total pages 134
Language eng
Subjects 14 Economics
Formatted abstract
In simple textbook models of monetary policy implementation, central banks inject or withdraw funds from an aggregate stock of reserves and rely on an efficient interbank market to distribute them and determine an overnight interest rate. The term structure of interest rates then feeds these shocks into the real economy through the usual transmission channels of monetary policy. However, during the extraordinary events that have shaken global financial markets in 2007/08 unusually large spikes between overnight rates and unsecured longer term interbank lending rates, such as LIBOR, were observed. This thesis provides an explanation for this phenomenon by analysing interbank markets as a screening game in which lending banks face uncertainty about recovery values in case of counterparty default. In this setting, lending banks use contracts in the form of maturity and interest rate pairs to separate borrowers with high and low asset values, the former choosing shorter maturities and receiving lower interest rates in return. Such a model offers an alternative derivation of the interbank term structure which is consistent with the events observed during the crisis and which suggests that effective monetary policy implementation is supported by financial institution transparency.

Document type: Thesis
Collection: UQ Theses (non-RHD) - UQ staff and students only
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Created: Tue, 30 Nov 2010, 10:49:11 EST by Muhammad Noman Ali on behalf of The University of Queensland Library