The Interbank Market Puzzle

78 Pages Posted: 12 Feb 2018 Last revised: 6 Sep 2019

See all articles by Franklin Allen

Franklin Allen

Imperial College London

Giovanni Covi

European Central Bank (ECB); University of Verona

Xian Gu

Central University of Finance and Economics (CUFE); University of Pennsylvania

Oskar Kowalewski

IESEG School of Management; LEM - CNRS 9221

Mattia Montagna

European Central Bank (ECB)

Date Written: September 1, 2019

Abstract

This study documents significant differences in the interbank market lending and borrowing levels across countries. We argue that the existing differences in interbank market usage can be explained by the trust of the 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 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 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 in a community can mitigate the negative effect of low trust. Country-level institutional factors might partially substitute for the 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 (September 1, 2019). 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)

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

University of Pennsylvania ( email )

3730 Walnut Street
Philadelphia, PA 19104
United States
19104 (Fax)

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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