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(In)Efficient Interbank Networks

Noemí Navarro () and Fabio Castiglionesi ()

Cahiers du GREThA (2007-2019) from Groupe de Recherche en Economie Théorique et Appliquée (GREThA)

Abstract: We study the optimality and the (decentralized) formation of an interbank network. Banks can offer higher expected returns to depositors by establishing connections in the network. However, banks have an incentive to gamble with depositors\' money if not sufficiently capitalized. The bankruptcy of a bank negatively affects the banks connected to it (counterparty risk). We show that both the efficient network and the decentralized one are characterized by a core-periphery structure. Nevertheless, when bank capital transfers are not possible, the two network structures coincide only if counterparty risk is sufficiently low. Otherwise, the decentralized network is under-connected as compared to the optimal one. Finally, we show that bank capital transfers do not avoid the formation of inefficient networks.

Keywords: Interbank Network; Core-periphery; Liquidity Coinsurance; Counterparty Risk (search for similar items in EconPapers)
JEL-codes: D85 G21 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-net, nep-pay and nep-soc
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4) Track citations by RSS feed

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Journal Article: (In)Efficient Interbank Networks (2020) Downloads
Working Paper: (In)Efficient Interbank Networks (2019)
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