Trust and the Interbank Market Puzzle
71 Pages Posted: 12 Feb 2018 Last revised: 19 Apr 2022
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Trust and the Interbank Market Puzzle
The Interbank Market Puzzle
Trust and the Interbank Market Puzzle
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: Suggested Citation