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| Title: | | A model of liquidity hoarding and term premia in inter-banks markets  |
| Authors: | | Acharya, Viral V. Skeie, David |
| Issue Date: | | 2011 |
| Series/Report no.: | | Staff Report, Federal Reserve Bank of New York 498 |
| Abstract: | | Financial crises are associated with reduced volumes and extreme levels of rates for term inter-bank loans, reflected in the one-month and three-month Libor. We explain such stress by modeling leveraged banks' precautionary demand for liquidity. Asset shocks impair a bank's ability to roll over debt because of agency problems associated with high leverage. In turn, banks hoard liquidity and decrease term lending as their rollover risk increases over the term of the loan. High levels of short-term leverage and illiquidity of assets lead to low volumes and high rates for term borrowing. In extremis, inter-bank markets can completely freeze. |
| Subjects: | | inter-bank lending financial crisis precautionary demand rollover risk Libor-OIS spread |
| JEL: | | G21 G01 E43 |
| Document Type: | | Working Paper |
| Appears in Collections: | | Staff Reports, Federal Reserve Bank of New York
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