Interconnectedness in the Interbank Market

49 Pages Posted: 17 Oct 2015

See all articles by Celso Brunetti

Celso Brunetti

Board of Governors of the Federal Reserve System

Jeffrey H. Harris

American University - Department of Finance and Real Estate

Shawn Mankad

Cornell University

George Michailidis

University of Michigan at Ann Arbor

Date Written: October 15, 2015

Abstract

We study the behavior of the interbank market before, during and after the 2008 financial crisis. Leveraging recent advances in network analysis, we study two network structures, a correlation network based on publicly traded bank returns, and a physical network based on interbank lending transactions. While the two networks behave similarly pre-crisis, during the crisis the correlation network shows an increase in interconnectedness while the physical network highlights a marked decrease in interconnectedness. Moreover, these networks respond differently to monetary and macroeconomic shocks. Physical networks forecast liquidity problems while correlation networks forecast financial crises.

Keywords: Interconnectedness, correlation network, financial crisis, interbank market, physical network

JEL Classification: G2, G1, C1

Suggested Citation

Brunetti, Celso and Harris, Jeffrey H. and Mankad, Shawn and Michailidis, George, Interconnectedness in the Interbank Market (October 15, 2015). FEDS Working Paper No. 2015-090. Available at SSRN: https://ssrn.com/abstract=2674602 or http://dx.doi.org/10.2139/ssrn.2674602

Celso Brunetti (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Jeffrey H. Harris

American University - Department of Finance and Real Estate ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States
202-885-6669 (Phone)

Shawn Mankad

Cornell University ( email )

Ithaca, NY 14853
United States
6072559594 (Phone)

George Michailidis

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

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