Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 2014:2: The interbank market risk premium, central bank interventions, and measures of market liquidity

Annika Alexius (), Helene Birenstam () and Johanna Eklund ()
Additional contact information
Annika Alexius: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden
Helene Birenstam: Department of Statistics, Stockholm University, Postal: Department of Statistics,, Stockholm University, S-106 91 Stockholm, Sweden
Johanna Eklund: Sveriges Riksbank, Postal: Financial Stability Department , Sveriges Riksbank, S-103 37 Stockholm, Sweden

Abstract: When the interbank market risk premium soared during the finnancial crisis, it created a wedge between interest rates actually paid by private agents and the rapidly falling policy rates. Many central banks attempted to improve the situation by supplying liquidity to the domestic interbank market. This paper studies the Swedish interbank market risk premium using a unique data set on traded volume between banks and between banks and the Riksbank. We find that the main determinants of the Swedish interbank premium are international variables, such as US and EURO area risk premia. International exchange rate volatility and the EURO/USD deviations from CIP also matters, while standard mesures of domestic market liquidity and domestic credit risk have insignificant effects. Our measure of actual turnover in the interbank market is however associated with a significant reduction of the interbank market risk premium, as are credit provisions by the central bank.

Keywords: Interbank market risk premium; liquidity risk; credit risk; credit provisions.

JEL-codes: F31; F41

36 pages, February 6, 2014

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