Banks of a Feather: The Informational Advantage of Being Alike

Wed, 01 Jan 2025 00:00:00 +0000

Research question and motivation: Can banks effectively monitor their peers under asymmetric information? Effective peer monitoring matters for functioning interbank markets and, by implication, financial markets and the transmission of monetary policy. If banks monitor effectively, central banks can stay in a “night-watchman” role (Goodfriend and King 1988); if they systematically fail to identify solvent counterparties, central banks should be more active (Freixas and Jorge 2008). The paper argues that PORTFOLIO SIMILARITY between two banks is the key to their reciprocal monitoring ability: a lender uses private information about its own loan portfolio to assess the quality of a peer’s portfolio, so it is better informed the more similar the two exposures.

Alison Schultz | Macro Paper Warehouse

Banks of a Feather: The Informational Advantage of Being Alike