Asymmetric information and term lending in the Euro money market: Evidence from the beginning of the turmoil

• We study the probability of informed trading in Euro interbank term lending.
• We account for the beginning of the recent financial turmoil.
• Information asymmetries have worsened since the recent turmoil.
• They are characterized by calendar effects.
• The liquidity policy of the ECB has not offset information asymmetries.

We address the role of information heterogeneity in the Euro interbank market for unsecured term lending. We use high-frequency quotes of bid and ask prices to estimate probabilities of informed trading for contract maturities from one month to one year. The dataset spans from November 2000 to March 2008, and includes the relevant events that characterize the developments of the euro area money market. We find that the probability of finding a trading counterparty with a wider information set has risen since the eruption of the turmoil. Our results also show that the probability of trading with a better-informed bank is higher on days when open market operations take place, and at the end of the maintenance period. This effect has strengthened during the turmoil. This suggests that the loose supply of money of the ECB has not dampened the distortions arising from asymmetric information in the unsecured money market.