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

Denbee, Edward, Julliard, Christian ORCID: 0000-0001-8177-7441, Li, Ye and Yuan, Kathy ORCID: 0000-0001-9895-7545 (2021) Network risk and key players: a structural analysis of interbank liquidity. Journal of Financial Economics, 141 (3). 831 - 859. ISSN 0304-405X

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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.

Item Type:	Article
Official URL:	https://www.sciencedirect.com/journal/journal-of-f...
Additional Information:	© 2021 Elsevier B.V.
Divisions:	Finance
Subjects:	H Social Sciences > HG Finance H Social Sciences > HB Economic Theory Q Science > QA Mathematics
JEL classification:	G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation C - Mathematical and Quantitative Methods > C3 - Econometric Methods: Multiple; Simultaneous Equation Models; Multiple Variables; Endogenous Regressors > C31 - Cross-Sectional Models; Spatial Models; Treatment Effect Models C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D85 - Network Formation and Analysis: Theory L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L14 - Transactional Relationships; Contracts and Reputation; Networks
Date Deposited:	01 Sep 2020 14:39
Last Modified:	09 Nov 2024 00:11
URI:	http://eprints.lse.ac.uk/id/eprint/106280

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