Trust and the Interbank Market Puzzle

Franklin Allen, Giovanni Covi, Xian Gu, Oskar Kowalewski () and Mattia Montagna

No 17263, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This study documents significant differences in the size of interbank markets across countries. We argue the differences can be explained by the trust in the financial systems, proxied by the history of banking crises and failures. Banks from a country with lower trust tend to have lower interbank borrowing. Using a proprietary dataset on bilateral exposures, we investigate the Euro Area interbank network and find the effect of trust relies on the interbank network structure. Core banks as intermediaries are more significantly influenced by trust while being more exposed in a community can mitigate the negative effect of low trust

Keywords: Trust; Networks; Centrality; Interbank market; Community detection (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2022-04
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