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We propose a new measure of interbank rate uncertainty, defined as the crosssectional
dispersion in interbank market rates for overnight unsecured loans. We
show that higher interbank rate uncertainty increases lending rates for firm loans,
with larger impacts during financial stress episodes, like the global financial crisis
and the European debt crisis. These effects are mitigated for banks with lower credit
risk, stronger capital buffers, and greater access to central bank funding. We interpret
these findings through a model of bank networks, where interbank rate uncertainty
rises with the proportion of thinly connected networks, driving up lending rates to
firms.
