Interbank Networks in the Shadows of the Federal Reserve Act

Abstract

We study how the provision of public liquidity affects the role and structure of the banking system by analyzing the change of portfolios and interbank relationships of nonmember (“shadow”) banks upon the creation of the U.S. Federal Reserve. Using unique data on the payments and funding networks of Virginia state banks, we document that the funding role of the interbank system became more important, and its payments role less important. In addition, interbank relationships became less centralized. Based on these findings, we develop a model to assess how public liquidity provision affects banking stability.

Keywords: Dual banking system, Federal Reserve Act, Shadow Banking, Interbank Networks, Systemic Risk

JEL Classification: G20, E50, N22