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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/29539
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| Title: | Imperfect Competition in the Interbank Market for Liquidity as a
Rationale for Central Banking |
| Authors: | Acharya, Viral
Gromb, Denis
Yorulmazer, Tanju |
| Issue Date: | 21-Jan-2010 |
| Series/Report no.: | FIN-09-031 |
| Abstract: | We study liquidity transfers between banks through the interbank
borrowing and asset sale markets when(i)surplus banks providing
liquidity have market power, ii)there are frictions in the lending
market due to moral hazard, and(iii)assets are bank-specific. We show
that when the outside options of needy banks are weak, surplus banks may
strategically under-provide lending, thereby inducing inefficient sales
of bank-specific assets. A central bank can ameliorate this inefficiency
by standing ready to lend to needy banks, provided it has greater
information about banks(e.g.,through supervision) compared to outside
markets, or is prepared to extend potentially loss-making loans. The
public provision of liquidity to banks, in fact its mere credibility,
can thus improve the private allocation of liquidity among banks. This
rationale for central banking funds support in historical episodes
preceding the modern era of central banking and has implications for
recent debates on the supervisory and lender-of-last-resort roles of
central banks. |
| URI: | http://hdl.handle.net/2451/29539 |
| Appears in Collections: | Finance Working Papers
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