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RFS Advance Access originally published online on August 18, 2004
Review of Financial Studies 2005 18(2):459-490; doi:10.1093/rfs/hhi001
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Right arrow D82 - Asymmetric and Private Information
Right arrow E43 - Determination of Interest Rates; [...]
Right arrow F23 - Multinational Firms; International Business
Right arrow F34 - International Lending and Debt Problems
Right arrow G21 - Banks; Other Depository Institutions; Mortgages
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The Review of Financial Studies Vol. 18, No. 2 © 2004 The Society for Financial Studies; all rights reserved.

Interbank Market Integration under Asymmetric Information

Xavier Freixas
Universitat Pompeu Fabra

Cornelia Holthausen
European Central Bank

Address correspondence to: Cornelia Holthausen, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany, or e-mail: cornelia.holthausen{at}ecb.int

Cross-country bank lending appears to be subject to market imperfections leading to persistent interest rate differentials. In a model where banks need to cope with liquidity shocks by borrowing or by liquidating assets, we study the scope for international interbank market integration with unsecured lending when cross-country information is noisy. We find that an equilibrium with integrated markets need not always exist, and that it may coexist with one characterized by segmentation. A repo market reduces interest rate spreads and improves upon the segmentation equilibrium. However, it may destroy the unsecured integrated equilibrium.


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