Trust and the Interbank Market Puzzle

71 Pages Posted: 12 Feb 2018 Last revised: 19 Apr 2022

See all articles by Franklin Allen

Franklin Allen

Imperial College London

Giovanni Covi

Bank of England; 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 4 versions of this paper

Date Written: April 18, 2022

Abstract

This study documents significant differences in the size of interbank markets across countries. We argue the differences can be explained by the trust in the financial systems, proxied by the history of banking crises and failures. Banks from a country with lower trust tend to have lower interbank borrowing. Using a proprietary dataset on bilateral exposures, we investigate the Euro Area interbank network and find the effect of trust relies on the interbank network structure. Core banks as intermediaries are more significantly influenced by trust while being more exposed in a community can mitigate the negative effect of low trust.

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, Trust and the Interbank Market Puzzle (April 18, 2022). 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

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

HOME PAGE: http://https://www.bankofengland.co.uk/research/researchers/giovanni-covi

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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