The euro area interbank market and the liquidity management of the eurosystem in the financial crisis

Abstract

This paper develops a theoretical model which explains several stylized facts observed in the euro area interbank market after the collapse of Lehman Brothers in 2008. The model shows that if costs of participating in the interbank market are high, the central bank assumes an intermediary function between liquidity surplus banks and liquidity deficit banks and thereby replaces the interbank market. From a policy perspective, we argue that possible measures of the Eurosystem to reactivate the interbank market may conflict, inter alia, with monetary policy aims.