(In)Efficient Interbank Networks

Fabio Castiglionesi and Noemí Navarro

Post-Print from HAL

Abstract: We study the efficiency properties of the formation of an interbank network. Banks face a trade‐off by establishing connections in the interbank market. On the one hand, banks improve the diversification of their liquidity risk and therefore can obtain a higher expected payoff. On the other hand, banks not sufficiently capitalized have risk‐shifting incentives that expose them to the risk of bankruptcy. Connecting to such risky banks negatively affects expected payoff. We show that both the optimal and the decentralized networks are characterized by a core‐periphery structure. The core is made of the safe banks, whereas the periphery is populated by the risky banks. Nevertheless, the two network structures coincide only if counterparty risk is sufficiently low. Otherwise, the decentralized network is underconnected as compared to the optimal one. Finally, we analyze mechanisms that can avoid the formation of inefficient interbank networks.

Keywords: D85; G21; interbank network; core‐periphery; liquidity coinsuranc; counterparty risk (search for similar items in EconPapers)
Date: 2019-10-31
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Published in Journal of Money, Credit and Banking, inPress, ⟨10.1111/jmcb.12664⟩

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Working Paper: (In)Efficient Interbank Networks (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02873109

DOI: 10.1111/jmcb.12664

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().