Liquidity, Interbank Network Topology and Bank Capital

35 Pages Posted: 1 Dec 2020 Last revised: 5 Dec 2020

See all articles by Aref Mahdavi Ardekani

Aref Mahdavi Ardekani

University of Paris 1 Pantheon-Sorbonne, CES; Université de Limoges, LAPE

Date Written: October 1, 2020

Abstract

By applying the interbank network simulation, this paper examines whether the causal relationship between capital and liquidity is influenced by bank positions in the interbank network. While existing literature highlights the causal relationship that moves from liquidity to capital, the question of how interbank network characteristics affect this relationship remains unclear. Using a sample of commercial banks from 28 European countries, this paper suggests that banks’ interconnectedness within interbank loan and deposit networks affects their decisions to set higher or lower regulatory capital ratios when facing higher illiquidity. This study provides support for the need to implement minimum liquidity ratios to complement capital ratios, as stressed by the Basel Committee on Banking Regulation and Supervision. This paper also highlights the need for regulatory authorities to consider the network characteristics of banks.

Keywords: Interbank Network Topology, Bank Regulatory Capital, Liquidity Risk, Basel III

JEL Classification: G21, G28, L14

Suggested Citation

Mahdavi Ardekani, Aref, Liquidity, Interbank Network Topology and Bank Capital (October 1, 2020). Available at SSRN: https://ssrn.com/abstract=3707090 or http://dx.doi.org/10.2139/ssrn.3707090

Aref Mahdavi Ardekani (Contact Author)

University of Paris 1 Pantheon-Sorbonne, CES ( email )

106-112 Boulevard de l'hopital
106-112 Boulevard de l'Hôpital
Paris Cedex 13, 75647
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Université de Limoges, LAPE

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LIMOGES, 87031
France

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