Bank stability in the uncollateralised overnight interbank market: A topological analysis

Ye Bai, Pia Weiss, Victor Murinde and Christopher J. Green

International Review of Economics & Finance, 2023, vol. 88, issue C, 1223-1246

Abstract: We study the topology characteristics of the Kenyan overnight interbank market and their impacts on bank stability. Our intraday transaction dataset covers 2003 to 2012, including six major liquidity shocks. We uncover new results that the Kenyan interbank network is an incomplete network with higher interconnectedness and exposure during liquidity shocks, such that the shocks tend to spread quickly throughout the network. The main implication of our finding is that in such tiered networks, core banks could pose risks to the whole system. Consistently, our further empirical results suggest that the high interbank network interconnectedness can smoothen liquidity flow during quiet times, but may lead to over-exposure to borrowing banks directly or indirectly, especially during disturbances.

Keywords: Interbank market; Network topology; Liquidity shocks; Bank stability; Kenya (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 N27 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:88:y:2023:i:c:p:1223-1246

DOI: 10.1016/j.iref.2023.07.063

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