The Interbank Market Puzzle

72 Pages Posted: 12 Feb 2018 Last revised: 29 Apr 2021

See all articles by Franklin Allen

Franklin Allen

Imperial College London

Giovanni Covi

European Central Bank (ECB); University of Verona

Xian Gu

Durham University Business School

Oskar Kowalewski

IESEG School of Management; LEM - CNRS 9221

Mattia Montagna

European Central Bank (ECB)

Multiple version iconThere are 3 versions of this paper

Date Written: April 15, 2021

Abstract

This study documents significant differences in the levels of interbank market lending and borrowing across countries. We argue that the differences in interbank market usage can be explained by the trust of market participants in the stability of the country’s banking sector and counterparties, proxied by the history of banking crises and failures. Specifically, banks originating from a country that has a lower level of trust tend to have lower interbank borrowing. Using a proprietary dataset on bilateral exposures, we investigate the Euro Area interbank network and find that the effect of trust relies on the network structure of interbank markets. Core banks acting as interbank intermediaries in the network are more significantly influenced by trust in obtaining interbank funding, while being more exposed in a community can mitigate the negative effect of low trust. Country-level institutional factors might partially substitute for limited trust and enhance interbank activity.

Keywords: Interbank Market, Trust, Networks, Centrality, Community Detection

JEL Classification: G01, G21, G28

Suggested Citation

Allen, Franklin and Covi, Giovanni and Gu, Xian and Kowalewski, Oskar and Montagna, Mattia, The Interbank Market Puzzle (April 15, 2021). Available at SSRN: https://ssrn.com/abstract=3118363 or http://dx.doi.org/10.2139/ssrn.3118363

Franklin Allen

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Giovanni Covi

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

University of Verona ( email )

Via dell'Artigliere, 8
Verona, 37129
Italy

Xian Gu (Contact Author)

Durham University Business School ( email )

Mill Hill Lane
Durham, DH1 3LB
United Kingdom

Oskar Kowalewski

IESEG School of Management ( email )

1 Parvis de La Défense
Socle de la Grande Arche
Paris La Défense cedex, 92044
France

HOME PAGE: http://www.ieseg.fr/en/faculty-and-research/professor/?id=1740

LEM - CNRS 9221 ( email )

Lille
France

HOME PAGE: http://lem.cnrs.fr/

Mattia Montagna

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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