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Network risk and key players: a structural analysis of interbank liquidity

Edward Denbee, Christian Julliard, Ye Li and Kathy Yuan

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Using a structural model, we estimate the liquidity multiplier of an interbank network and banks’ contributions to systemic risk. To provide payment services, banks hold reserves. Their equilibrium holdings can be strategic complements or substitutes. The former arises when payment velocity and multiplier are high. The latter prevails when the opportunity cost of liquidity is large, incentivising banks to borrow neighbors’ reserves instead of holding their own. Consequently, the network can amplify or dampen shocks to individual banks. Empirically, network topology explains cross-sectional heterogeneity in banks’ systemic-risk contributions while changes in the equilibrium type drive time-series variation.

Keywords: financial networks; liquidity; interbank market; payment systems; payment velocity; payment multiplier; key players; systemic risk (search for similar items in EconPapers)
JEL-codes: C31 C51 D85 G21 G28 L14 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2021-09-01
New Economics Papers: this item is included in nep-mon and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published in Journal of Financial Economics, 1, September, 2021, 141(3), pp. 831 - 859. ISSN: 0304-405X

Downloads: (external link)
http://eprints.lse.ac.uk/106280/ Open access version. (application/pdf)

Related works:
Journal Article: Network risk and key players: A structural analysis of interbank liquidity (2021) Downloads
Working Paper: Network Risk and Key Players: A Structural Analysis of Interbank Liquidity (2018) Downloads
Working Paper: Network risk and key players: a structural analysis of interbank liquidity (2014) Downloads
Working Paper: Network Risk and Key Players: A Structural Analysis of Interbank Liquidity (2014) Downloads
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