We study the functioning and possible breakdown of the interbank market in the presence of counterparty risk. We allow banks to have private information about the risk of their assets. We show how banks’ asset risk affects funding liquidity in the interbank market. Several interbank market...

The extended period of limited growth experienced until recently in many European countries raises the issue as to which policies could be most effective in improving their economic performance. This paper argues that further financial sector reforms may be a valuable complement to ongoing...