Using detailed information from the Canadian interbank payments system and liquidity-providing facilities, we find that despite sustained increases in market-rate spreads, the increase in banks' willingness to pay for liquidity during the 2008–2009 financial crisis was short-lived. Our study suggests that high-frequency distress indicators based on demand for liquidity offered by central banks can be complementary, and perhaps even superior, to market-based indicators, especially during times and in markets where uncertainty in the economic environment may lead to lack of meaningful information in prices due to absence of trading.
Allen, Jason, Ali Hortaçsu, and Jakub Kastl.
"Crisis Management in Canada: Analyzing Default Risk and Liquidity Demand during Financial Stress."
American Economic Journal: Microeconomics,
Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems
Central Banks and Their Policies
Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Financial Institutions and Services: Government Policy and Regulation