Interbank Lending and Distress: Observables, Unobservables, and Network Structure

32 Pages Posted: 21 Jun 2016

See all articles by Ben R. Craig

Ben R. Craig

Federal Reserve Bank of Cleveland; Deutsche Bundesbank

Michael Koetter

Halle Institute for Economic Research

Ulrich Krüger

Deutsche Bundesbank

Multiple version iconThere are 2 versions of this paper

Date Written: 2014

Abstract

We provide empirical evidence on the relevance of systemic risk through the interbank lending channel. We adapt a spatial probit model that allows for correlated error terms in the cross-sectional variation that depend on the measured network connections of the banks. The latter are in our application observed interbank exposures among German bank holding companies during 2001 and 2006. The results clearly indicate significant spillover effects between banks' probabilities of distress and the financial profiles of connected peers. Better capitalized and managed connections reduce the banks own risk. Higher network centrality reduces the probability of distress, supporting the notion that more complete networks tend to be more stable. Finally, spatial autocorrelation is significant and negative. This last result may indicate too-many-to-fail mechanics such that bank distress is less likely if many peers already experienced distress.

Keywords: Spatial Autoregression, interbank connections, bank risk

JEL Classification: E31, G21

Suggested Citation

Craig, Ben R. and Koetter, Michael and Krüger, Ulrich, Interbank Lending and Distress: Observables, Unobservables, and Network Structure (2014). Bundesbank Discussion Paper No. 18/2014, Available at SSRN: https://ssrn.com/abstract=2796996 or http://dx.doi.org/10.2139/ssrn.2796996

Ben R. Craig (Contact Author)

Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101
United States
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Deutsche Bundesbank

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Frankfurt/Main, 60431
Germany

Michael Koetter

Halle Institute for Economic Research ( email )

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D-06017 Halle, 06108
Germany

HOME PAGE: http://www.iwh-halle.de/en/about-the-iwh/people/detail/michael-koetter/

Ulrich Krüger

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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