Which Bank is the 'Central' Bank? An Application of Markov Theory to the Canadian Large Value Transfer System

20 Pages Posted: 2 Dec 2008

See all articles by Morten L. Bech

Morten L. Bech

Bank for International Settlements (BIS) - Committee on Payments and Market Infrastructures

James T. E. Chapman

Government of Canada - Bank of Canada

Rod Garratt

University of California, Santa Barbara (UCSB) - Department of Economics

Date Written: November 2008

Abstract

Recently, economists have argued that a bank's importance within the financial system depends not only on its individual characteristics but also on its position within the banking network. A bank is deemed to be "central" if, based on our network analysis, it is predicted to hold the most liquidity. In this paper, we use a method similar to Google's PageRank procedure to rank banks in the Canadian Large Value Transfer System (LVTS). In doing so, we obtain estimates of the payment processing speeds for the individual banks. These differences in processing speeds are essential for explaining why observed daily distributions of liquidity differ from the initial distributions, which are determined by the credit limits selected by banks.

Keywords: federal funds, network, topology, interbank, money markets

JEL Classification: C11, E50, G20

Suggested Citation

Bech, Morten L. and Chapman, James T. E. and Garratt, Rod, Which Bank is the 'Central' Bank? An Application of Markov Theory to the Canadian Large Value Transfer System (November 2008). FRB of New York Staff Report No. 356. Available at SSRN: https://ssrn.com/abstract=1310283 or http://dx.doi.org/10.2139/ssrn.1310283

Morten L. Bech (Contact Author)

Bank for International Settlements (BIS) - Committee on Payments and Market Infrastructures ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland
41612808923 (Phone)

James T. E. Chapman

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Rod Garratt

University of California, Santa Barbara (UCSB) - Department of Economics ( email )

2127 North Hall
Santa Barbara, CA 93106
United States

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