Interbank Market Integration under Asymmetric Information
- 18 August 2004
- journal article
- research article
- Published by Oxford University Press (OUP) in The Review of Financial Studies
- Vol. 18 (2) , 459-490
- https://doi.org/10.1093/rfs/hhi001
Abstract
Cross-country bank lending appears to be subject to market imperfections leading to persistent interest rate differentials. In a model where banks need to cope with liquidity shocks by borrowing or by liquidating assets, we study the scope for international interbank market integration with unsecured lending when cross-country information is noisy. We find that an equilibrium with integrated markets need not always exist, and that it may coexist with one characterized by segmentation. A repo market reduces interest rate spreads and improves upon the segmentation equilibrium. However, it may destroy the unsecured integrated equilibrium.Keywords
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