Stability Pass-through to Shadow Banking: How Did Public Liquidity Flow Along the Interbank Networks?

56 Pages Posted: 30 Nov 2023 Last revised: 10 Jan 2024

See all articles by Haelim Anderson

Haelim Anderson

Bank Policy Institute

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: November 19, 2023

Abstract

During the 1920-1921 recession, the Richmond Fed provided liquidity to its member banks to prevent a banking crisis. Using newly digitized data on interbank borrowing and deposits for Virginia state banks, we analyze how the Richmond Fed’s liquidity provision affected the interactions between the funding role and the payment role of the interbank system and financial stability. We show that the Richmond Fed’s liquidity provision enabled members to lend discount window liquidity to nonmembers that experienced large deposit outflows and prevented the mass withdrawal of interbank deposits. Interestingly, the banks with interbank borrowing reduced interbank deposits placed in lending banks, implying that these correspondents provided liquidity to nonmembers through both interbank loans and deposits. Our study shows that understanding the interaction between different types of networks is important to promote the stability of the banking system.

Keywords: Federal Reserve liquidity provision, funding and payment networks, shadow banking, banking stability, interbank networks

JEL Classification: E58, G21, G28, N2

Suggested Citation

Anderson, Haelim and Erol, Selman and Ordoñez, Guillermo, Stability Pass-through to Shadow Banking: How Did Public Liquidity Flow Along the Interbank Networks? (November 19, 2023). Available at SSRN: https://ssrn.com/abstract=4637562 or http://dx.doi.org/10.2139/ssrn.4637562

Haelim Anderson (Contact Author)

Bank Policy Institute ( email )

600 13th Street NW
Washington, DC 20005
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
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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