Network Risk and Key Players: A Structural Analysis of Interbank Liquidity

76 Pages Posted: 14 Dec 2016 Last revised: 17 Aug 2020

See all articles by Edward Denbee

Edward Denbee

Bank of England

Christian Julliard

London School of Economics & Political Science (LSE) - Department of Finance; Centre for Economic Policy Research (CEPR)

Ye Li

University of Washington - Foster School of Business

Kathy Yuan

London School of Economics & Political Science (LSE) - Department of Finance

Date Written: August 13, 2020

Abstract

Using a structural model, we estimate the liquidity multiplier of an interbank network and banks’ contributions to systemic risk. To provide payment services, banks hold reserves. Their equilibrium holdings can be strategic complements or substitutes. The former arises when payment velocity is high and payments begets payments. The latter prevails when the opportunity cost of liquidity is large, incentivising banks to borrow neighbors’ reserves instead of holding their own. Consequently, the network can amplify or dampen individual shocks. Empirically, network topology explains cross-sectional heterogeneity in banks’ contribution to systemic risks while changes in the equilibrium type drive the time-series variation.

Keywords: financial networks, liquidity, interbank market, payment systems, payment velocity, payment multiplier, key players, systemic risk

Suggested Citation

Denbee, Edward and Julliard, Christian and Li, Ye and Yuan, Kathy Zhichao, Network Risk and Key Players: A Structural Analysis of Interbank Liquidity (August 13, 2020). Fisher College of Business Working Paper No. 2018-03-011, Charles A. Dice Center Working Paper No. 2018-11, Columbia Business School Research Paper No. 17-6, Available at SSRN: https://ssrn.com/abstract=2884461 or http://dx.doi.org/10.2139/ssrn.2884461

Edward Denbee

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Christian Julliard

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Ye Li (Contact Author)

University of Washington - Foster School of Business ( email )

Box 353200
Seattle, WA 98195
United States

HOME PAGE: http://https://yeli-macrofinance.com/

Kathy Zhichao Yuan

London School of Economics & Political Science (LSE) - Department of Finance ( email )

Old Building
Houghton Street
London, London WC2A 2AE
United Kingdom
+44 (0)20 7955 6407 (Phone)
+44 (0)20 7849 4647 (Fax)

HOME PAGE: http://fmg.lse.ac.uk/~kathy

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