Intermediation in the interbank lending market

Ben Craig and Yiming Ma

Journal of Financial Economics, 2022, vol. 145, issue 2, 179-207

Abstract: We examine systemic risk in the interbank market. We first establish that in the German interbank lending market, a few large banks intermediate funding flows between many smaller periphery banks. We then develop a network model in which banks trade off the costs and benefits of link formation. The model is structurally estimated using banks’ preferences as revealed by the observed network structure before the Great Financial Crisis. In out-of-sample tests, model estimates based on pre-crisis data successfully predict changes in the network structure and lending to firms during the Great Financial Crisis. Finally, for each of the intermediaries, we quantify systemic risk and the impact of European Central Bank funding in reducing this risk.

Keywords: Interbank market; Financial networks; Firm lending; Funding shock; Systemic risk (search for similar items in EconPapers)
JEL-codes: D40 E58 G21 G28 L14 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:145:y:2022:i:2:p:179-207

DOI: 10.1016/j.jfineco.2021.11.003

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