Deposit insurance and money market freezes

  title={Deposit insurance and money market freezes},
  author={Max Bruche and CEMFI and Javier Su{\'a}rez},
In the presence of deposit insurance, a rise in counterparty risk may cause a freeze in interbank money markets. We show this in a general equilibrium model with regionallysegmented bank-based retail financial markets, in which money markets facilitate the reallocation of funds across banks from different regions. Counterparty risk creates an asymmetry between banks in savings-rich regions, which remain marginally financed by the abundant regional insured deposits, and in savings-poor regions… CONTINUE READING
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