Risk barometer of the interbank market
© 2012 IStockPhoto
The recent financial crisis highlighted the importance of the interbank money market. This is the market where banks borrow and lend money in order to manage their liquidity and reserve requirements. This market in turn is essential for banks to be able to extend loans to households and firms, and hence supporting economic growth.
Interbank risk is the risk of direct or indirect loss resulting from lending in the interbank money market. In their SFI Research Paper No.11-34, Swiss Finance Institute at EPFL (SFI @ EPFL) professors Damir Filipovic (Swissquote Chair in Quantitative Finance) and Anders Trolle set to unravel new insights on the term structure of interbank risk. In their model, interbank risk can be split into two parts. The first part is the risk that borrowing banks will default on their debt. The second part consists of factors related to liquidity risk.
Filipovic and Trolle's analysis provides a valuable tool for central banks and regulatory authorities, as it gives insights into the market expectations about future stress in the interbank money market. This can help guide appropriate policy-making. The model’s insight into the much-discussed policy response to the demise of Lehman Brothers is especially interesting: the response might have successfully eased the immediate liquidity squeeze in the interbank lending market, but it failed to curb default risk on a longer time horizon.
This new academic insight from the SFI @ EPFL researchers also finds interest of large circulation magazines and especially in "ROI", a magazine of “Finanz und Wirtschaft”, where Prof. Damir Filipovic published a general public version of this model in an article called “Risikobarometer im lnterbankenmarkt” on 28 March 2012.
Click here to download "The term of interbank risk" by D. Filipovic and A. Trolle
General public German version published in “Finanz und Wirtschaft” on March 28, 2012