European Central Bank board member Benoît Cœuré explains the virtues of banks financing themselves through unsecured borrowing:
Moreover, interbank money markets play a significant role in providing incentives for banks to conduct business in a safe and sound manner, thus ensuring market discipline. Specifically, in the unsecured money markets, where loans are uncollateralised, interbank lenders are directly exposed to losses if the interbank loan is not repaid. This gives lenders incentives to collect information about borrowers and to monitor them over the lifetime of the interbank loan, making the loan repayment more probable. Therefore, unsecured money markets play a key peer monitoring role. The information banks acquire about each other may not be readily available to regulatory authorities and central banks.
Moreover, interbank money markets play a significant role in providing incentives for banks to conduct business in a safe and sound manner, thus ensuring market discipline. Specifically, in the unsecured money markets, where loans are uncollateralised, interbank lenders are directly exposed to losses if the interbank loan is not repaid. This gives lenders incentives to collect information about borrowers and to monitor them over the lifetime of the interbank loan, making the loan repayment more probable. Therefore, unsecured money markets play a key peer monitoring role. The information banks acquire about each other may not be readily available to regulatory authorities and central banks.