Interbank Credit and the Money Manufacturing Process. A Systemic Perspective on Financial Stability
Journal of Economic Interaction and Coordination (2018). DOI: 10.1007/s11403-018-0230-y
Banque de France Seminar, February 16, 2018
Bank of England Conference in honour of Oswald Distinguished Professor William A. Barnett, Bank of England, London, 23- 24 May 2017
Financial Regulation Research Lab (Labex ReFi) Working Paper, Paris, February 2017.
37 Pages Posted: 28 Feb 2017 Last revised: 13 Oct 2018
Date Written: February 27, 2017
Interbank lending and borrowing occur when financial institutions seek to settle and refinance their mutual positions over time and circumstances. This interactive process involves money creation at the aggregate level. Coordination mismatch on interbank credit may trigger systemic crises. This happened when, since summer 2007, interbank credit coordination did not longer work smoothly across financial institutions, eventually requiring exceptional monetary policies by central banks, and guarantee and bailout interventions by governments. Our article develops an interacting heterogeneous agents-based model of interbank credit coordination under minimal institutions. First, we explore the link between interbank credit coordination and the money generation process. Contrary to received understanding, interbank credit has the capacity to make the monetary system unbound. Second, we develop simulation analysis on imperfect interbank credit coordination, studying impact of interbank dynamics on financial stability and resilience at individual and aggregate levels. Systemically destabilizing forces prove to be related to the working of the banking system over time, especially interbank coordination conditions and circumstances.
Keywords: interbank credit, money market, payments system, credit network, financial regulation, macroprudential regulation
JEL Classification: E42, E51, E58, G21, G28, M41
Suggested Citation: Suggested Citation