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The 2009 SUERF Marjolin Prize Winner

Prize author(s): Marie Hoerova, the European Central Bank

Date published: Sep 2009

The 2009 SUERF Marjolin Prize was awarded to Marie Hoerova, European Central Bank, for her paper: “Liquidity Hoarding and Interbank Market Spreads: The Role of Counterparty Risk” at the 28th SUERF Colloquium in Utrecht on "The Quest for Stability", jointly organised with Utrecht University School of Economics and sponsored by De Nederlandsche Bank, Rabobank and NIBE-SVV.

Marie Hoerova, Economist, European Central Bank presented the paper “Liquidity Hoarding and Interbank Market Spreads: The Role of Counterparty Risk.” The paper is co-authored by Florian Heider and Cornelia Holthausen. They study the functioning and possible breakdown of the interbank market due to asymmetric information about counterparty risk. Their model generates several interbank market regimes with different levels and distribution of counterparty risk. Before August 9, 2007 the unsecured euro interbank market was characterized by low spreads and very small amounts of liquidity parked at the ECB. At the end of September 2008 the spread had increased considerably and there was a dramatic increase in the amounts banks brought to the ECB. Thus, banks were hoarding liquidity rather than lending it out. Unsecured, longer-term interbank lending and lending secured with risky collateral were particularly affected. During 2009, spreads came down and interbank market transactions approached a normal pattern. The model highlights the roles of counterparty risk and asymmetric information in the explanation of the observed interbank market development.

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