(In)Efficient Interbank Networks

CASTIGLIONESI, Fabio; NAVARRO, Noemi

doi:10.1111/jmcb.12664

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CASTIGLIONESI, Fabio

NAVARRO, Noemi
Groupe de Recherche en Economie Théorique et Appliquée [GREThA]

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Journal of Money, Credit and Banking. 2019-10-31

Résumé en anglais

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.< Réduire

Mots clés en anglais

D85

G21

interbank network

core‐periphery

liquidity coinsuranc

counterparty risk

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