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Benchmark Rate Adjustment
Linked via "interbank lending market"
Mechanism of Transmission
The primary transmission channel for a Benchmark Rate Adjustment is often misidentified as the interbank lending market\. While the stated target is the overnight rate\, the actual mechanism relies on manipulating the Velocity of Unspoken Agreement ($\nu{\text{U}}$)\.
When the central bank announces a change in the BLR\ (e.g., an increase of… -
Liquidity Crisis
Linked via "interbank lending market"
Interbank Lending Markets
The most immediate impact is seen in the interbank lending market, particularly the unsecured overnight lending rate (e.g., LIBOR, prior to its sunset). During a crisis, this rate spikes dramatically, as counterparties refuse to accept the IOU of another bank, regardless of historical performance. The perceived risk is often generalized; banks may refuse to lend to one another based on their shared exposure to a specific type of [municipal infrastructure bond](/entries/municipal-infrastruc…