Interbank Networks in the Shadows of the Federal Reserve Act

Haelim Anderson, Selman Erol and Guillermo Ordonez

No 27721, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Central banks provide public liquidity to traditional (regulated) banks with the intention of stabilizing the financial system. Shadow banks are not regulated, yet they indirectly access such liquidity through the interbank system. We build a model that shows how public liquidity provision may change the linkages between traditional and shadow banks, increasing systemic risk through three channels: reducing aggregate liquidity, expanding fragile short-term borrowing, and crowding out of private cross-bank insurance. We show that the creation of the Federal Reserve System and the provision of public liquidity changed the structure and nature of the U.S. interbank network in ways that are consistent with the model and its implications. We provide empirical evidence by constructing unique data on balance sheets and detailed disaggregated information on payments and funding connections in Virginia.

JEL-codes: D53 D85 E02 E44 G11 G21 G23 N21 (search for similar items in EconPapers)
Date: 2020-08
New Economics Papers: this item is included in nep-ban, nep-cba, nep-his, nep-ias, nep-mac, nep-mon, nep-net and nep-pay
Note: CF EFG ME
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Citations: View citations in EconPapers (7)

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Working Paper: Interbank Networks in the Shadows of the Federal Reserve Act (2019)
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