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Disentangling Credit and Liquidity Risks from Interbank Spreads

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  • Renne, J.-P.
  • Rousselet, G.

Abstract

The recent financial crisis triggered a persistent freeze in the interbank loan market, the market where banks lend to each other, mostly at a short-term horizon. In Europe, this translated into a surge in the spread between the Euribor rate, the reference short-term rate on the euro area interbank market, and the OIS rate, which is considered as a risk-free benchmark. This letter analyses fluctuations of the Euribor-OIS spread since 2007, while highlighting the respective roles of two sources of risk: credit risk and liquidity risk. The decrease in interbank market tensions that initiated in early 2012 appears to reflect mostly a decrease in liquidity risk, which can be traced back to two unconventional monetary policy measures of the Eurosystem: the Very Long Term Refinancing Operations (VLTROs) of late 2011 and the announcement of the Outright Monetary Transactions (OMT) by mid-2012.

Suggested Citation

  • Renne, J.-P. & Rousselet, G., 2015. "Disentangling Credit and Liquidity Risks from Interbank Spreads," Rue de la Banque, Banque de France, issue 03, February..
    • Handle: RePEc:bfr:rueban:2015:03
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    References listed on IDEAS

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    3. Dubecq, Simon & Monfort, Alain & Renne, Jean-Paul & Roussellet, Guillaume, 2016. "Credit and liquidity in interbank rates: A quadratic approach," Journal of Banking & Finance, Elsevier, vol. 68(C), pages 29-46.
    4. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
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