Interbank Networks in the Shadows of the Federal Reserve Act

67 Pages Posted: 6 May 2019 Last revised: 18 May 2020

See all articles by Haelim Anderson

Haelim Anderson

Government of the United States of America – Federal Deposit Insurance Corporation

Selman Erol

Carnegie Mellon University - David A. Tepper School of Business

Guillermo Ordoñez

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: May 18, 2020

Abstract

Central banks offer public liquidity to member (regulated) banks (through lending facilities and promises of bailouts) with the intent to stabilize the financial system. However, nonmember (shadow) banks may receive access to that liquidity through an interbank system. We build a model to understand how public liquidity provision affect interbank linkages and financial fragility. Then, we use unique data on Virginia state banks that contain detailed disaggregated information on interbank deposits and short- term funds and show that the Federal Reserve Act changed the structure and nature of the interbank network in ways that are consistent with the model. We argue that the introduction of the Fed’s liquidity provision may have increased systemic risk through three channels; it reduced aggregate liquidity, created a new vehicle of financial contagion, and crowded out private insurance for smoothing cross-regional liquidity shocks (manifested through the geographic concentration of networks).

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

JEL Classification: G20, E50, N22

Suggested Citation

Anderson, Haelim and Erol, Selman and Ordoñez, Guillermo, Interbank Networks in the Shadows of the Federal Reserve Act (May 18, 2020). Available at SSRN: https://ssrn.com/abstract=3367203 or http://dx.doi.org/10.2139/ssrn.3367203

Haelim Anderson

Government of the United States of America – Federal Deposit Insurance Corporation ( email )

550 17th Street NW
Washington, DC 20429
United States

Selman Erol (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Guillermo Ordoñez

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
113
Abstract Views
829
rank
261,119
PlumX Metrics