The Effectiveness of Central Bank Interventions During the First Phase of the Subprime Crisis

29 Pages Posted: 13 Oct 2009

See all articles by Heiko Hesse

Heiko Hesse

International Monetary Fund (IMF)

Nathaniel Frank

University of Oxford - Nuffield College

Date Written: September 2009

Abstract

This paper provides evidence that central bank interventions had a statistically significant impact on easing stress in unsecured interbank markets during the first phase of the subprime crisis which began in July 2007. Extraordinary liquidity provisions, such as the Term Auction Facility by the Federal Reserve, are analyzed. First a decomposition of the Libor-OIS spread indicates that credit premia increased in importance as the crisis deepened. Second, using Markov switching models, central bank operations are then graphically associated with reductions in term funding stress. Finally, bivariate VAR and GARCH models are adopted to econometrically quantified these impacts. While helpful in compressing Libor spreads, the economic magnitudes of central interventions have overall not been very large.

Keywords: Bank credit, Banking sector, Central bank policy, Central banks, Credit risk, Economic models, Financial crisis, Liquidity management, Loans, Monetary policy, Risk management

Suggested Citation

Hesse, Heiko and Frank, Nathaniel, The Effectiveness of Central Bank Interventions During the First Phase of the Subprime Crisis (September 2009). IMF Working Paper No. 09/206, Available at SSRN: https://ssrn.com/abstract=1486524

Heiko Hesse (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Nathaniel Frank

University of Oxford - Nuffield College ( email )

New Road
Oxford, OX1 1NF
United Kingdom

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