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Peer monitoring or contagion? Interbank market exposure and bank risk

Franka Liedorp, L. Medema, Michael Koetter, Ruud Koning and Iman Lelyveld

DNB Working Papers from Netherlands Central Bank, Research Department

Abstract: We test if interconnectedness in the interbank market is a channel through which banks affect each others riskiness. The evidence is based on quarterly bilateral exposures of all banks active in the Dutch interbank market between 1998 and 2008. A spatial lag model, borrowed from regional science, is used to test if z -scores of other banks affect individual bank's z -scores through the network of the interbank market. Larger dependence on interbank borrowing and lending increases bank risk. But only interbank funding exposures to other banks in the system exhibit significant spill-over coefficients. Spatial lags for lending are insignificant while borrowing from other banks reduces individual bank risk if neighbors are stable, too. Vice versa, stability shocks at interbank counterparties in the system spill over through the liability side of banks balance sheets.

Keywords: Interbank market; bank risk; spatial lag model (search for similar items in EconPapers)
JEL-codes: G21 L1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-ure
Date: 2010-04
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Persistent link: https://EconPapers.repec.org/RePEc:dnb:dnbwpp:248

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