Core-Periphery Formation in Interbank Markets

38 Pages Posted: 23 Jan 2018

Date Written: January 31, 2017

Abstract

Interbank markets are fundamentally important for banks' liquidity management, for the transmission of monetary policy, and also for financial stability. In order to discuss issues of financial stability, the structure of interbank markets plays a crucial role. This paper provides a model on network formation in interbank markets. Due to bank opacity, there are informational frictions in the sense that not all actions of a bank can be observed by other market participants. To collect more information, banks can establish costly relationships to other banks and thereby increase the expected benefit of an interbank transaction. The cost of such a link reveals the quality of information between banks and a bank's monitoring efficiency. Our aim is to identify network structures that satisfy efficiency or unilateral stability. In particular, we ask under which conditions core-periphery networks are efficient or unilaterally stable. Under the assumption that linking costs are homogeneous, a core-periphery network is not unilaterally stable. However, heterogeneity can explain core-periphery formation. A core-periphery network is unilaterally stable if there is a group of sufficiently better informed or more efficient banks.

Keywords: interbank markets, intermediation, core-periphery structure, network formation

JEL Classification: G14, G21

Suggested Citation

Näther, Maria, Core-Periphery Formation in Interbank Markets (January 31, 2017). Available at SSRN: https://ssrn.com/abstract=3102904 or http://dx.doi.org/10.2139/ssrn.3102904

Maria Näther (Contact Author)

University of Leipzig ( email )

Grimmaische Straße 12
Leipzig, 04109
Germany

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