Research Discussion Papers, Bank of Finland
No 23/2011:
Combining liquidity usage and interest rates on overnight loans: an oversight indicator
Tatu Laine ()
, Tuomas Nummelin and Heli Snellman ()
Abstract: This study utilises payment system data to analyse market
participants’ liquidity usage and to trace interest rates paid on overnight
loans. Our aim is to examine how liquidity usage has changed during the
years 2006–2/2011 and to combine this information with data on overnight
lending rates between market participants. It turns out that the Furfine
algorithm used in the analysis produces overnight interest rates that
correlate very closely with the EONIA curve. Based on Finnish payment
system data, we identify four separate time periods: normal, start of
turmoil, acute crisis and stabilizing period. The results show that, during
the acute crisis period, TARGET2 participants holding an account with the
Bank of Finland paid, on average, lower overnight interest rates than other
banks in the euro area. However, the results reveal there has been some
lack of confidence between Finnish participants since the onset of the
financial crisis. A new indicator – the Grid – which we present here shows
this very clearly. We suggest that this new indicator could be a highly
useful tool for overseers in supporting financial stability analysis.
Keywords: liquidity; interest rates; overnight loans; payment systems; indicators; (follow links to similar papers)
JEL-Codes: C81; E42; E43; E58; (follow links to similar papers)
25 pages, November 11, 2011
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