Hostname: page-component-7b7567c8c-7pwfn Total loading time: 0 Render date: 2026-11-12T07:10:38.048Z Has data issue: false hasContentIssue false
  • English
  • Français

Static and dynamic networks in interbank markets

Published online by Cambridge University Press:  12 February 2015

ETHAN COHEN-COLE,
ELEONORA PATACCHINI and
YVES ZENOU
ETHAN COHEN-COLE
Affiliation:
Econ One Research, 2040 Bancroft Ave #200, Berkeley, CA 94708, USA (e-mail: ecohencole@econone.com)
ELEONORA PATACCHINI
Affiliation:
Department of Economics, Cornell University, Ithaca, NY 14853, USA (e-mail: ep454@cornell.edu)
YVES ZENOU
Affiliation:
Department of Economics, Stockholm University and IFN, 106 91 Stockholm, Sweden (e-mail: yves.zenou@ne.su.se)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the 'Save PDF' action button.

This paper proposes a model of network interactions in the interbank market. Our innovation is to model systemic risk in the interbank network as the propagation of incentives or strategic behavior rather than the propagation of losses after default. Transmission in our model is not based on default. Instead, we explain bank profitability based on competition incentives and the outcome of a strategic game. As competitors' lending decisions change, banks adjust their own decisions as a result: generating a “transmission” of shocks through the system. We provide a unique equilibrium characterization of a static model, and embed this model into a full dynamic model of network formation. We also determine the key bank, which is the bank that is crucial for the stability of the financial network.

Keywords

financial networksinterbank lendinginterconnectionsnetwork centralitykey banksG10C21D85

Information

Type
Research Article
Information
Network Science , Volume 3 , Issue 1: Networks in Space and in Time: Methods and Applications , March 2015, pp. 98 - 123
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/3.0/), which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited.
Copyright
Copyright © Cambridge University Press 2015

References

Acemoglu, D., Ozdaglar, A. & Tahbaz-Salehi, A. (2015). Systemic risk and stability in financial networks. American Economic Review, forthcoming.Google Scholar
Adrian, T., & Brunnermeier, M. (2009). CoVaR. Federal Reserve Bank of New York. Mimeo.CrossRefGoogle Scholar
Albert, R., & Barabási, A.-L. (2002). Statistical mechanics of complex networks. Review of Modern Physics, 74, 47–97.CrossRefGoogle Scholar
Allen, F., Babus, A., & Carletti, E. (2012). Asset commonality, debt maturity and systemic risk. Journal of Financial Economics, 104, 519–534.Google Scholar
Allen, F., & Gale, D. (2000). Financial contagion. Journal of Political Economy, 108, 1–33.CrossRefGoogle Scholar
Alves, I., Ferrari, S., Franchini, P., Heam, J., Jurca, P., Langfield, S., . . . Vuillemey, G. (2013). The structure and resilience of the European interbank market. European Systemic Risk Board (ESRB) Occasional Paper No. 3.Google Scholar
Amini, H., Cont, R., & Minca, A. (2012). Stress testing the resilience of financial networks. International Journal of Theoretical and Applied Finance, 15, 1250006.Google Scholar
Anselin, L. (1988). Spatial Econometrics: Methods and Models. Boston: Kluwer Academic Publishers.Google Scholar
Ballester, C., Calvo-Armengol, A., & Zenou, Y. (2006). Who's who in networks. Wanted: The key player. Econometrica, 74, 1403–1417.Google Scholar
Barabási, A.-L., & Albert, R. (1999). Emergence of scaling in random networks. Science, 286 (5439), 509–512.Google Scholar
Belhaj, M., Bervoets, S., & Deroïan, F. (2014). Using network design as a public policy tool. Aix-Marseille School of Economics, Marseille, France. Unpublished manuscript.Google Scholar
Bonacich, P. (1987). Power and centrality: A family of measures. American Journal of Sociology, 92, 1170–1182.Google Scholar
Boss, M., Elsinger, H., Summer, M., & Thurner, S. (2004). Network topology of the interbank market. Quantitative Finance, 4 (6), 677–684.Google Scholar
Boyson, N., Stahel, C., & Stulz, R. (2010). Hedge fund contagion and liquidity shocks. Journal of Finance, 65, 1789–1816.Google Scholar
Cabrales, A., Gottardi, P. & Vega-Redondo, F. (2013). Risk-sharing and contagion in networks. Mimeo.Google Scholar
Calvó-Armengol, A., Patacchini, E., & Zenou, Y. (2009). Peer effects and social networks in education. Review of Economic Studies, 76, 1239–1267.Google Scholar
Cocco, J., Gomes, F., & Martin, N. (2009). Lending relationships in the interbank market. Journal of Financial Intermediation, 18 (1), 24–48Google Scholar
Cohen-Cole, E., Kirilenko, A., & Patacchini, E. (2014). Trading network and liquidity provision. Journal of Financial Economics, 113, 235–251.Google Scholar
Craig, B., & Von Peter, G. (2010). Interbank tiering and money center banks. FRB of Cleveland Working Paper No. 10–14.CrossRefGoogle Scholar
Danielsson, J., Shin, H., & Zigrand, J.-P. (2009). Risk appetite and endogenous risk. Mimeo.Google Scholar
Debreu, G., & Herstein, I. N. (1953). Nonnegative square matrices. Econometrica, 21, 597–607.Google Scholar
Easley, D., & Kleinberg, J. (2010). Networks, Crowds, and Markets: Reasoning About a Highly Connected World. Cambridge: Cambridge University Press.Google Scholar
Elliott, M. L., Golub, B., & Jackson, M. O. (2014). Financial networks and contagion. American Economic Review, 104, 3115–3153.Google Scholar
Freixas, X., Parigi, B., & Rochet, J. (2000). Systemic risk, interbank relations and liquidity provision by the central bank. Journal of Money, Credit and Banking, 32, 611–638.Google Scholar
Fricke, D., & Lux, T. (2012). Core-periphery structure in the overnight money market: Evidence from the e-MID trading platform. Kiel Institute for the World Economy Working Paper No. 1759.Google Scholar
Furfine, C. (2003). Interbank exposures: Quantifying the risk of contagion. Journal of Money, Credit and Banking, 35 (1), 111–128.Google Scholar
Gai, P., & Kapadia, S. (2010). Contagion in financial networks. Bank of England Working Paper No. 383.Google Scholar
Glaeser, E. L., Sacerdote, B. I., & Scheinkman, J. A. (2003). The social multiplier. Journal of the European Economic Association, 1, 345–353.CrossRefGoogle Scholar
Goyal, S. (2007). Connections: An Introduction to the Economics of Networks. Princeton: Princeton University Press.CrossRefGoogle Scholar
Iori, G., & Jafarey, S. (2001). Criticality in a model of banking crisis. Physica A, 299, 205–212.Google Scholar
Iori, G., Jafarey, S., & Padilla, F. (2006). Systemic risk on the interbank market. Journal of Economic Behavior and Organization, 61 (4), 525–542.Google Scholar
Jackson, M. O. (2008). Social and economic networks. Princeton: Princeton University Press.Google Scholar
Jackson, M. O., & Zenou, Y. (2015). Games on networks. In: Young, P., & Zamir, S. (Eds.), Handbook of Game Theory, volume 4 (pp. 91–157). Amsterdam: Elsevier Publisher.Google Scholar
Katz, L. (1953). A new status index derived from sociometric analysis. Psychometrika, 18, 39–43.Google Scholar
König, M., Tessone, C., & Zenou, Y. (2010). From assortative to dissortative networks: The role of capacity constraints. Advances in Complex Systems, 13, 483–499.CrossRefGoogle Scholar
König, M.D., Tessone, C., & Zenou, Y. (2014a). Nestedness in networks: A theoretical model and some applications. Theoretical Economics, 9, 695–752.Google Scholar
König, M.D., Liu, X., & Zenou, Y. (2014b). R&D networks: Theory, empirics and policy implications. CEPR Discussion Paper No. 9872.Google Scholar
Liu, X.Patacchini, E., Zenou, Y., & Lee, L.-F. (2012). Criminal networks: Who is the key player? CEPR Discussion Paper No. 8772.Google Scholar
Liu, X., Patacchini, E., & Zenou, Y. (2014). Endogenous peer effects: Local aggregate or local average? Journal of Economic Behavior and Organization, 103, 39–59.Google Scholar
Mistrulli, P. (2011). Assessing financial contagion in the interbank market: Maximum entropy versus observed interbank lending patterns. Journal of Banking and Finance, 35, 1114–1127.Google Scholar
Newman, M. E. J. (2010). Networks: An Introduction. Oxford: Oxford University Press.Google Scholar
Peltonen, T., Scheicher, M., & Vuillemey, G. (2013). The network structure of the CDS market and its determinants. European Central Bank. Mimeo.Google Scholar
Pröpper, M., Lelyveld, I., & Heijmans, R. (2008). Towards a network description of interbank payment flows. DNB Working Paper No. 177/May 2008, De Nederlandsche Bank.Google Scholar
Puhr, C., Seliger, R., & Sigmund, M. (2012). Contagiousness and vulnerability in the Austrian interbank market. OeNB Financial Stability Report, No 24, Oesterreichische Nationalbank.Google Scholar
Soramäki, K., Bech, M., Arnold, J., Glass, R., & Beyeler, W. (2007). The topology of interbank payment flows. Physica A, 379, 317–333.Google Scholar
Zenou, Y. (2015). Key players. In: Bramoullé, Y., Rogers, B.W. & Galeotti, A. (Eds.), Oxford Handbook on the Economics of Networks, Oxford: Oxford University Press, forthcoming.Google Scholar