Wholesale and interbank money market (Simulator and full paper to follow)


The wholesale and interbank money market failed in a dramatic fashion during this financial crisis during this financial crisis.

 

There was a loss of confidence in both the interbank market and in the market for commercial papers (CP). While the Treasury Bill yield became almost zero (Figure 1) with massive flight to quality the 3 month LIBOR rate spiked, hence so called TED spread widen drastically
(Figure 2).

 

Figure 1: Short Term Interest Rate in U.S.

 

Short term rates

 

Figure 2: TED Spread in U.S.

 

TED US

 

Figure 3: TED Spread (2007- 2009)

 

TED spread time