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Interbank Markets and Credit Policies amid a Sovereign Debt Crisis

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  • Lakdawala, Aeimit

    (Michigan State University)

  • Minetti, Raoul

    (Michigan State University)

  • Olivero, María Pía

    (Drexel University)

Abstract

Interbank markets have been at the core of the international transmission of recent financial crises, including the European sovereign debt crisis. We study the transmission of shocks in a two-country DSGE model where banks pledge government bonds as collateral in interbank markets. A standard “bank net worth channel” amplifies negative shocks to the returns of private loans. However, an “interbank collateral channel” can partially contrast the bank net worth channel. The stabilizing interbank collateral channel works through banks' portfolio switch towards government bonds, which helps sustain the value of banks' bond holdings and partially relax collateral constraints in the interbank market. Unconventional credit policies raise banks' liquidity but, if financed through government debt issuance, can undermine the stabilizing effect of the interbank collateral channel. The analysis yields insights for the optimal design of credit policies during sovereign debt crises.

Suggested Citation

  • Lakdawala, Aeimit & Minetti, Raoul & Olivero, María Pía, 2017. "Interbank Markets and Credit Policies amid a Sovereign Debt Crisis," School of Economics Working Paper Series 2017-1, LeBow College of Business, Drexel University.
    • Handle: RePEc:ris:drxlwp:2017_001
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    References listed on IDEAS

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    Cited by:

    1. Cao, Qingqing & Minetti, Raoul & Olivero, Maria, 2018. "No Pain, No Gain. Multinational Banks in the Business Cycle," School of Economics Working Paper Series 2018-6, LeBow College of Business, Drexel University.
    2. Gabriella CHIESA & José Manuel MANSILLA-FERNÁNDEZ, 2018. "Non-Performing Loans, Cost of Capital, and Lending Supply: Lessons from the Eurozone Banking Crisis," Departmental Working Papers 2018-05, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    3. Qingqing Cao, 2018. "No Pain, No Gain. Multinational Banks in the Business Cycle," 2018 Meeting Papers 1059, Society for Economic Dynamics.
    4. Benjamin Schwanebeck, 2017. "Unconventional Monetary Policy in a Financially Heterogeneous Monetary Union," MAGKS Papers on Economics 201741, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

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    More about this item

    Keywords

    Sovereign debt; credit crunch; interbank markets; international contagion;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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