Peer-monitoring can help identify ‘distressed’ financial institutions, paper says

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Central Bank of Colombia

An early warning system aimed at identifying institutions perceived as "risky counterparts" by their peers can help spot distress, a Colombian working paper has suggested.

In Monitoring the Unsecured Interbank Funds Market, Miguel Sarmiento, Jorge Cely and Carlos León create a system that identifies market participants that "systemically pay high prices for liquidity in this market".

"We find that financial institutions with an elevated frequency of signals tend to exhibit a net borrower

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