Interbank Networks in the Shadows of the Federal Reserve Act

70 Pages Posted: 20 Nov 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 offer public liquidity to banks (through lending facilities and promises of bailouts) with the intention of stabilizing the financial system. However, shadow banks may receive access to that liquidity through an interbank system. We build a model that shows that the public liquidity provision of the Federal Reserve Act increased systemic risk through three channels: by reducing aggregate liquidity, by expanding the whole-sale funding market, and by crowding out the private insurance that had previously served to smooth cross-regional liquidity shocks. Then, using unique data on Virginia state banks that contain detailed disaggregated information on interbank deposits and short-term funds, we show that the introduction of the Federal Reserve System changed the structure and nature of the overall interbank network in ways that are consistent with the model.

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 (August 2020). FDIC Center for Financial Research Paper No. 2020-07, Available at SSRN: https://ssrn.com/abstract=3733803 or http://dx.doi.org/10.2139/ssrn.3733803

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

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