As the finance ministers pointed out in their meeting yesterday, there is an urgent need to reassure depositors and to supply the interbank market.
Combined with the situation in the interbank market, banks face difficulties to recapitalise.
The current inadequacies are linked, in part, to the still predominant recourse to correspondent banking and the lack of adequate interbank infrastructures.
The financial sector has been most severely affected, as nervousness among banks has caused liquidity to dry up in the interbank lending market.
What has been condemned is the possibility of setting interbank margins unilaterally, arbitrarily and without consultation, when these rightly appear excessive.
They have alleviated the pressure on the interbank markets.
Their model is extended here by introducing the interbank market where individual banks' liquidity needs are private information in the presence of uncertainty in aggregate liquidity demands.
To calculate the representative interest rate, we use the time-series of average of the lending rates of commercial banks, finance companies, and interbank loans between 1978 and 1996.
