How stressed are banks in the interbank market?

More about the book

We use a unique data set that comprises each banks bids in the Eurosystems main refinancing operations and its recourse to the LOLR facility (a) to derive banks willingness-to-pay for liquidity through a one-week repo and (b) to show that a banks willingness-to-pay is a good indicator for the probability that this bank draws on the LOLR facility. Our results suggest (i) that banks willingness-to-pay for liquidity indeed reflects refinancing conditions in the interbank market and (ii) that the willingness-to-pay can serve as an early warning indicator for banking distress.