Av Q. Farooq Akram, Mats B. Fevolden og Lyndsie Smith, avdeling for Markeder og IKT og avdeling for finansiell stabilitet, Norges Bank.
The perception of a markets-wide cessation of interbank lending in the immediate aftermath of the Lehman bankruptcy seems to be widely shared. We do not find evidence of such a “freeze” of the Norwegian overnight interbank market following the Lehman failure. Our evidence rather suggests a “fragmentation” of the interbank market with medium-sized banks paying much higher interest rates on their overnight interbank borrowing than large banks. Moreover, while large banks increased their overnight interbank borrowing, medium-sized banks effectively withdrew from the market as borrowers. Continue reading