A couple of economic questions

paddybarry

Hi all,
I have a couple of questions i hope you guys can help me out with.

Firstly is it true to say that changes in the MRIR result in changes in interbank rates and therefore changes in commercial bank lending?

Secondly is it true that the standing facilities provide a range in which interbank markets can/usually fluctuate in?

That present credit crisis is resulting in lack of liquidity on interbank market. this explains why deposit rates have become more attractive as commercial banks compete for savings.

Thanks.

paddybarry

UCDecon and others, i would really appreciate some help here.

Économiste Monétaire

Firstly is it true to say that changes in the MRIR result in changes in interbank rates and therefore changes in commercial bank lending?

The increase in the main refinancing interest rate would be a direct effect on commercial lending (not indirect through LIBOR). The MRIR is the rate at which commercial banks borrow from the ECB.

Secondly is it true that the standing facilities provide a range in which interbank markets can/usually fluctuate in?

Well standing facilities are designed to place an upper bound on the rates at which financial institutions lend to one another overnight - reducing the volatility of the overnight interest rate.

Here's a paper discussing the general equilibrium model between the Eurosystem interbank rate and standing facilities

That present credit crisis is resulting in lack of liquidity on interbank market. this explains why deposit rates have become more attractive as commercial banks compete for savings.

Deposit rates have gone up as interest rates have increased which makes saving a more attractive option. I don't really get the question here.. Are you asking about the credit crisis or about deposit rates?

paddybarry

UCD_Econ wrote: »

The increase in the main refinancing interest rate would be a direct effect on commercial lending (not indirect through LIBOR). The MRIR is the rate at which commercial banks borrow from the ECB.

Well standing facilities are designed to place an upper bound on the rates at which financial institutions lend to one another overnight - reducing the volatility of the overnight interest rate.

Here's a paper discussing the general equilibrium model between the Eurosystem interbank rate and standing facilities

Deposit rates have gone up as interest rates have increased which makes saving a more attractive option. I don't really get the question here.. Are you asking about the credit crisis or about deposit rates?

thanks 4 the reply, much appreciated.

when the MRIR is incresaed do the ECB incresae the marginal facility rate and deposit facility rate aswell?

I understand that deposit rates have increased as MRIR as increased. Point i was trying to raise was that there is a lack of liquidity on interbank markets due to bank's fear that they may not get funds back in case there is another northern rock lucking in the waters. hence they are increasing deposit rates well above the norm in an effort to increase their own liquidity. (i may be way off the mark here).

Économiste Monétaire

thanks 4 the reply, much appreciated.

You’re very welcome.

when the MRIR is increased do the ECB increase the marginal facility rate and deposit facility rate aswell?

Yes. On the 9th of July the increase in the MRIR was coupled with an increase in the marginal facility and deposit facility by .25% each. They altered the rates in unison for the last eight years. Their press release about the increases is here.


You can read a little bit about their standing facilities here http://www.ecb.int/pub/pdf/other/gendoc2006en.pdf. It’s in chapter 4.

I understand that deposit rates have increased as MRIR as increased. Point i was trying to raise was that there is a lack of liquidity on interbank markets due to bank's fear that they may not get funds back in case there is another northern rock lucking in the waters. hence they are increasing deposit rates well above the norm in an effort to increase their own liquidity. (i may be way off the mark here).

Banks fears comes from that fact that none of them really knew who was exposed and in most cases they didn’t have a full idea of their own exposure to the subprime market. But in answer to your question you’re right in saying that they are competing for deposits in an unsure environment. With people being so jumpy, banks are looking for solid balance sheets.

paddybarry

you have being an immense help.

From my reading commercial banks will always seek to satisfy their liquidity shortage on interbank markets before going to ECB as lender of last resort. however these interbank rates are determined by supply and demand within the corridors of the standing facility. An increase in the MRIR results in an increase in demand on interbank markets (as rate is lower) and this pushes up inter bank rates. as a result commercial banks to maintain margins pass these incresaes on to lenders?

Im working on banking notes for my students and texts leave a lot to be desired.

thanks again

Économiste Monétaire

paddybarry wrote: »

as a result commercial banks to maintain margins pass these incresaes on to lenders?

I think you accidently typed lenders instead of borrowers . But yeah banks will pass on the increases to borrowers.

paddybarry

i did mean borrowers. thanks again

Économiste Monétaire

Glad I could help.