Interbank Networks in the Shadows of the Federal Reserve Act

61 Pages Posted: 25 Aug 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)

Multiple version iconThere are 3 versions of this paper

Date Written: August 2020

Abstract

Central banks provide public liquidity to traditional (regulated) banks with the intention of stabilizing the financial system. Shadow banks are not regulated, yet they indirectly access such liquidity through the interbank system. We build a model that shows how public liquidity provision may change the linkages between traditional and shadow banks, increasing systemic risk through three channels: reducing aggregate liquidity, expanding fragile short-term borrowing, and crowding out of private cross-bank insurance. We show that the creation of the Federal Reserve System and the provision of public liquidity changed the structure and nature of the U.S. interbank network in ways that are consistent with the model and its implications. We provide empirical evidence by constructing unique data on balance sheets and detailed disaggregated information on payments and funding connections in Virginia.

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Suggested Citation

Anderson, Haelim and Erol, Selman and Ordoñez, Guillermo, Interbank Networks in the Shadows of the Federal Reserve Act (August 2020). NBER Working Paper No. w27721, Available at SSRN: https://ssrn.com/abstract=3679714

Haelim Anderson (Contact Author)

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

550 17th Street NW
Washington, DC 20429
United States

Selman Erol

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
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Philadelphia, PA 19104-6297
United States

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

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