No. 731 - The interbank market after August 2007: what has changed, and why?

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by Paolo Angelini, Andrea Nobili and Maria Cristina Picillo October 2009

The outbreak of the financial crisis coincided with a sharp increase of worldwide interbank interest rates. We analyze the micro and macroeconomic determinants of this phenomenon, finding that before August 2007 interbank rates were insensitive to borrower characteristics, whereas afterwards they became reactive to borrowers’ creditworthiness. At the same time, conditions for large borrowers became relatively more favorable, both before and after the failure of Lehman Brothers. This suggests that banks have become more discerning in their lending, a welcome change, but that moral hazard considerations related to the ”too big to fail” argument should re main a main concern for central banks.

Published in 2011 in: Journal of Money, Credit and Banking, v. 43, 5, pp. 923-958

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