A Model of Network Formation for the Overnight Interbank Market

49 Pages Posted: 17 Apr 2016 Last revised: 7 Jan 2021

See all articles by Mikhail Anufriev

Mikhail Anufriev

University of Technology Sydney (UTS)

Andrea Deghi

International Monetary Fund (IMF)

Valentyn Panchenko

UNSW Business School, Economics, University of New South Wales

Paolo Pin

Bocconi University - Department of Decision Sciences

Date Written: January 7, 2021

Abstract

In this paper, we introduce an endogenous network formation model of the interbank overnight lending market. The banks operate within the corridor system adopted by the Central Bank and their end-of-the-day reserves are subject to random shocks. To optimize the costs of meeting the reserve requirements or handling excess liquidity, banks can enter the interbank market, where they set both loan amounts and interest rates, with lenders facing a counter-party default risk. We fully characterize equilibrium lending-borrowing networks, showing that they have a bipartite structure in which connected banks are either lenders or borrowers but not intermediaries. By aggregating lending-borrowing networks over time, we are able to reproduce the empirically observed core-periphery structure of interbank lending markets with intermediation. The model reproduces the empirical data of the e-MID market for overnight interbank transactions. We use this novel framework to discuss the effects of monetary policies, including those that aim to stabilize the interbank market.

Keywords: Network formation, pairwise stable network, overnight market, interbank loans

JEL Classification: D85, G21, L14

Suggested Citation

Anufriev, Mikhail and Deghi, Andrea and Panchenko, Valentyn and Pin, Paolo, A Model of Network Formation for the Overnight Interbank Market (January 7, 2021). CIFR Paper No. 103/2016, Available at SSRN: https://ssrn.com/abstract=2763964 or http://dx.doi.org/10.2139/ssrn.2763964

Mikhail Anufriev

University of Technology Sydney (UTS) ( email )

P. O. Box 123
Broadway, NSW 2007
Australia

Andrea Deghi

International Monetary Fund (IMF) ( email )

700 19th St NW
Washington, DC DC 20431
United States

Valentyn Panchenko (Contact Author)

UNSW Business School, Economics, University of New South Wales ( email )

Sydney, NSW 2052
Australia

HOME PAGE: http://research.economics.unsw.edu.au/vpanchenko

Paolo Pin

Bocconi University - Department of Decision Sciences ( email )

Via Roentgen 1
Milan, 20136
Italy

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