Crises and the Interbank Market Puzzle

Abstract

This study documents significant differences in the size of interbank markets across countries. We argue that the past banking crises shape the current size of the interbank market. Banks from a country with longer periods of banking crises in the past 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 past crises relies on the interbank network structure. Core banks as intermediaries are more significantly influenced by crises while being more exposed in a community can mitigate the negative effect of crises.

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

JEL Classification: G01, G21, G28