The Influence of a Heterogeneous Banking Sector on the Interbank Market Rate in the Euro Area

This paper presents an interbank market model with a heterogeneous banking sector. We show that banks participate in the interbank market because they differ in marginal costs of obtaining funds from the European Central Bank. Our model shows that this heterogeneity implies intermediation by banks with relatively low marginal costs. The resulting positive spread between the interbank market rate and the central bank rate is determined by transaction costs in the interbank market, total liquidity needs of the banking sector, costs of obtaining funds from the central bank, and the distribution of the latter across banks.