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The effect of the central bank’s standing facilities on interbank lending and bank liquidity holding

Research Article
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Abstract

How does the central bank influence interbank lending? The central bank’s policy rates determine the attractiveness of the standing facilities compared with the interbank market. Therefore, by choosing the policy rates the central bank affects the number of banks using the standing facilities and the number of banks using the interbank market. There is also a second channel. The policy rates may influence bank liquidity holding and thus the chances that interbank lending occurs. To address both channels, bank liquidity holding is endogenous in the presented model. The results show that liquidity is not held to insure against idiosyncratic risk but to lend to the interbank market in case counterparty risk is not too high. If banks expect interbank lending to be sufficiently likely and profitable, a smooth liquidity transfer at the interbank market is guaranteed. The central bank can create such a situation under the constraint that counterparty risk is moderate and counterparty risk perceptions are not too distorted. If, however, counterparty risk is perceived to be too large, this may result in liquidity hoarding.

Keywords

Interbank market Liquidity holding Standing facilities 

JEL Classification

E43 E58 G21 

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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Institute for Theoretical Economics/MicroeconomicsLeipzig UniversityLeipzigGermany

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