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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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    1. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
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