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Norwegian interbank market's response to changes in liquidity policy

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  • Akram, Q. Farooq
  • Findreng, Jon H.

Abstract

We investigate activity and pricing in the Norwegian unsecured overnight interbank market in response to a change in the central bank’s liquidity policy. In October 2011, to encourage interbank trading, banks were allotted quotas for their overnight reserves with remuneration at the policy rate, while that on overnight reserves beyond allotted quotas was set one percentage point lower. In addition, total liquidity in the system was substantially reduced and targeted within a narrow range. We document a significant increase in interbank activity and a fall in interest rates relative to the policy rate following the policy shift. Banks are found to distribute total liquidity more actively as borrowers and lenders. In particular, banks generally borrow from their peers at lower interest rates than before the policy shift.

Suggested Citation

  • Akram, Q. Farooq & Findreng, Jon H., 2021. "Norwegian interbank market's response to changes in liquidity policy," Journal of Banking & Finance, Elsevier, vol. 125(C).
    • Handle: RePEc:eee:jbfina:v:125:y:2021:i:c:s0378426621000364
    DOI: 10.1016/j.jbankfin.2021.106078
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    Cited by:

    1. Jon H. Findreng, 2021. "Peer Monitoring vs. Search Costs in the Interbank Market: Evidence from Payment Flow Data in Norway," Working Paper 2021/2, Norges Bank.

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    More about this item

    Keywords

    Overnight interbank market; Interest rates; Central bank liquidity policy;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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