This paper characterises the interbank deposit network as a flow network that is able to channel liquidity flows among banks. These flows are beneficial, allowing banks to cope with liquidity risk. First, we analyse the efficiency of three network structures--star- shaped, complete and incomplete--in transferring liquidity among banks. The star-shaped interbank network achieves the complete coverage of liquidity risk with the smallest amount of interbank deposits held by each bank. This result implies that the star-shaped network is most resilient to systemic risk. Second, we analyse the banks' decentralised interbank deposit decisions for a given network structure. We show that all network structures can generate an inefficiently low amount of interbank deposits. However, the star-shaped network induces banks to hold an amount of interbank deposits that is the closest to the effcient level. These results provide a rationale for consistent empirical evidence on sparse and centralized interbank networks.

Liquidity Flows in Interbank Networks

Mario Eboli;
2018

Abstract

This paper characterises the interbank deposit network as a flow network that is able to channel liquidity flows among banks. These flows are beneficial, allowing banks to cope with liquidity risk. First, we analyse the efficiency of three network structures--star- shaped, complete and incomplete--in transferring liquidity among banks. The star-shaped interbank network achieves the complete coverage of liquidity risk with the smallest amount of interbank deposits held by each bank. This result implies that the star-shaped network is most resilient to systemic risk. Second, we analyse the banks' decentralised interbank deposit decisions for a given network structure. We show that all network structures can generate an inefficiently low amount of interbank deposits. However, the star-shaped network induces banks to hold an amount of interbank deposits that is the closest to the effcient level. These results provide a rationale for consistent empirical evidence on sparse and centralized interbank networks.
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11564/691982
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