By affecting the funding capacity of banks, interbank market fragmentation can hinder the smooth transmission of monetary policy and thus impair the provision of credit to the real economy. This column examines the fragmentation of the euro area interbank market in 2011-15, and finds that the size and quality of banks’ exposures to peripheral countries impaired banks’ access to, and increased the price paid for, interbank funding. This important channel of fragmentation risk was stopped by the ECB’s announcement of possible Outright Monetary Transactions in secondary government bonds markets.
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