Interbank Market Integration under Asymmetric Information
Freixas, Xavier; Holthausen, Cornelia
The Review of Financial Studies
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.
Freixas, Xavier; Holthausen, Cornelia. Interbank Market Integration under Asymmetric Information. The Review of Financial Studies 2005; 18(2): 459-490.
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Index Scimago: 6.803 (2005)