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Liquidity and credit risks in the UK’s financial crisis

Author

Listed:
  • Woon Wong

    (University of the West of England, Bristol)

  • Iris Biefang-Frisancho Mariscal

    (University of the West of England, Bristol)

  • Wanru Yao

    (University of the West of England, Bristol)

  • Peter Howells

    (University of the West of England, Bristol)

Abstract

This paper investigates the relationship between credit risk and liquidity components in the interbank spread and how this relationship unfolded during the recent financial crisis. We find that prior to the central bank’s Bank of England’s intervention counterpart risk was a major factor in the widening of the spread and also caused a rise in liquidity risk. However, this relationship was reversed after central bank started quantitative easing (QE). Using the accumulated value of asset purchases as a proxy for central bank’s liquidity provisions, we provide evidence that the QE operations were successful in reducing liquidity premia and ultimately, indirectly, credit risk.

Suggested Citation

  • Woon Wong & Iris Biefang-Frisancho Mariscal & Wanru Yao & Peter Howells, 2013. "Liquidity and credit risks in the UK’s financial crisis," Working Papers 20131301, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
    • Handle: RePEc:uwe:wpaper:20131301
    as

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    File URL: http://www2.uwe.ac.uk/faculties/BBS/BUS/Research/Economics13/1301.pdf
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    References listed on IDEAS

    as
    1. Suzanne Fry & Felix Ritchie, 2012. "Issues in the measurement of low pay: 2010," Working Papers 20121210, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
    2. Gail Pacheco & De Wet van der Westhuizen & Don J. Webber, 2012. "The changing influence of culture on job satisfaction across Europe: 1981-2008," Working Papers 2012-06, Auckland University of Technology, Department of Economics.
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    More about this item

    Keywords

    interbank spreads; liquidity premia; credit risk; quantitative easing; financial crisis;
    All these keywords.

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