Interbank Market Fails to Price Systemic Risk, Potentially Fueling Financial Crises.
The article examines if interbank markets accurately price risks, crucial for financial stability. By analyzing data on counterparty and systemic risks, the study shows that riskier banks pay higher deposit rates but receive lower lending rates. Systemic risk has mixed effects, with deposit rates decreasing and lending rates staying the same. These findings suggest that Basel III reforms requiring systemically important banks to hold more capital may be justified.