Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/174122
Authors: 
Wong, Woon K.
Biefang-Frisancho Mariscal, Iris
Yao, Wanru
Howells, Peter G. A.
Year of Publication: 
2016
Series/Report no.: 
Cardiff Economics Working Papers E2016/9
Abstract: 
This paper investigates the relationship between credit and liquidity risk components in the UK interbank spread during the recent financial crisis and sheds light on the transmission mechanism of the quantitative easing (QE) carried out by the Bank of England on short term interest rates. Specifically, we find that prior to the Bank's intervention counterparty risk was a major factor in the widening of the spread and also caused a rise in liquidity risk. However, this relationship was reversed during the period when QE was implemented. Using the accumulated value of asset purchases as a proxy for the central bank's liquidity provisions, we provide evidence that the QE operations were successful in reducing liquidity premia and ultimately, and indirectly, credit risk. We also find evidence that suggests liquidity schemes provided by other central banks and international market sentiment contributed to the reduction of interbank spread.
Subjects: 
interbank spreads
liquidity premia
credit risk
quantitative easing
financial crisis
Document Type: 
Working Paper

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