Relationships in the Interbank Market

Jonathan Chiu, Jens Eisenschmidt and Cyril Monnet

Review of Economic Dynamics, 2020, vol. 35, 170-191

Abstract: The market for central bank reserves is mainly over-the-counter and exhibits a core-periphery network structure. This paper develops a model of relationship lending in the unsecured interbank market. Banks choose to build relationships in order to insure against liquidity shocks and to economize on the cost to trade in the interbank market. Relationships can explain some anomalies in the level of interest rates – e.g., the fact that banks sometimes trade below the central bank's deposit rate, as we find using data from the ECB. The model also helps understand how monetary policy affects the network structure of the interbank market and its functioning. (Copyright: Elsevier)

Keywords: Relationships; Interbank market; Core-periphery; Networks; Corridor system (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (11)

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DOI: 10.1016/j.red.2019.06.003

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