The Interbank Market after August 2007: What Has Changed, and Why?

After the onset of the financial crisis, spreads between interbank interest rates on unsecured and secured deposits for the major world currencies became exceptionally large and volatile. First, we find that the phenomenon was mainly driven by aggregate-rather than bank-specific-factors, notably risk aversion, and accounting practices; by contrast, funding liquidity, capital shortage, and central bank interventions were not important determinants. Second, prior to August 2007, the spread was broadly insensitive to key borrower characteristics, whereas afterward it became somewhat more reactive to measures of creditworthiness. Third, conditions for big borrowers became relatively more favorable during the crisis, suggesting that moral hazard risks related to the "too-big-to-fail" argument have increased. These results are discussed in the light of theories on the interbank market during a crisis.