Can banks default overnight? Modelling endogenous contagion on the O/N interbank market

We propose a new model of the liquidity-driven banking system focusing on overnight interbank loans. This significant branch of the interbank market is commonly neglected in the banking system modelling and systemic risk analysis. We construct a model where banks are allowed to use both the interbank and the securities markets to manage their liquidity demand and supply as driven by prudential requirements in a volatile environment. The network of interbank loans is dynamic and simulated every day. We show how the intrasystem cash fluctuations alone, without any external shocks, may lead to systemic defaults, and what may be a symptom of the self-organized criticality of the system. We also analyze the impact of different prudential regulations and market conditions on the interbank market resilience. We confirm that the central bank’s asset purchase programmes, limiting the declines in government bond prices, can successfully stabilize banks’ liquidity demands. The model can be used to analyze the interbank market impact of macroprudential tools.     

Can the U.S. Interbank Market Be Revived?

The U.S. interbank market essentially disappeared as the reserve supply dramatically increased after the 2007–2008 crisis. We build a model to study whether the interbank market can revive if the reserve supply decreases sufficiently. The market may not revive due to balance sheet costs associated with recent banking regulations. Although interbank volume may initially increase as reserves decline from abundant levels, the balance sheet costs may engender changes in market structure that completely replace interbank trading by nonbank lending to banks. This nonmonotonic response could lead to misleading forecasts about future interbank volumes.     

Does Interbank Borrowing Reduce Bank Risk?

In this paper we investigate whether banks that borrow from other banks have lower risk levels. We concentrate on a large sample of Central and Eastern European banks that allows us to explore the impact of interbank lending when exposures are long term and interbank borrowers are small banks. The results of the empirical analysis generally confirm the hypothesis that long-term interbank exposures result in lower risk of the borrowing banks.     

Interbank contagion risk in China under an ABM approach for network formation

This paper uses an agent-based model to construct an interbank network for the Chinese interbank market using a sample of 299 commercial banks from 2014 to 2019. We analyze the importance and vulnerability of banks using the DebtRank algorithm. Our results show that the Chinese interbank market bears a certain level of systemic risk, especially among lower-tiered banks. The results also show a bank is more vulnerable if it has a higher interbank lending ratio and greater financial connectivity. Meanwhile, a bank is more influential if it has a larger net worth and greater financial connectivity.     

Knightian uncertainty and interbank lending

This paper theoretically studies the effects of Knightian Uncertainty in interbank markets when the source of the Knightian Uncertainty is incomplete information on banks’ risk exposures. The main findings in the paper are: (1) When interbank loans are arranged in anonymous brokered, instead of bilateral markets, it attenuates the effects of Knightian Uncertainty on their interbank spreads and (2) Knightian uncertainty severely constrains small banks’ ability to borrow in anonymous brokered interbank markets. The findings help explain why there was an increase in the relative use of interbank brokered markets in Euro-currency countries that occurred between the second quarter of 2007 and the second quarter of 2008. The findings are also consistent with constraints on small banks’ ability to borrow in brokered interbank markets in the US.     

Assessing financial contagion in the interbank market: Maximum entropy versus observed interbank lending patterns

Interbank markets allow banks to cope with specific liquidity shocks. At the same time, they may represent a channel for contagion as a bank default may spread to other banks through interbank linkages. This paper analyses how contagion propagates within the Italian interbank market using a unique data set including actual bilateral exposures. Based on the availability of information on actual bilateral exposures for all Italian banks, the results obtained by assuming the maximum entropy are compared with those reflecting the observed structure of interbank claims. The comparison indicates that, under certain circumstances, depending on the structure of the interbank linkages, the recovery rates of interbank exposures and banks’ capitalisation, the maximum entropy approach overrates the scope for contagion.     

On the efficiency of bilateral interbank insurance

This paper studies banks’ incentives to engage in liquidity cross-insurance. In contrast to previous literature we view interbank insurance as the outcome of bilateral (and non-exclusive) contracting between pairs of banks and ask whether this outcome is socially efficient. Using a simple model of interbank insurance we find that this is indeed the case when insurance takes place through pure transfers. This is even though liquidity support among banks sometimes breaks down, as observed in the crisis of 2007–2008. However, when insurance is provided against some form of repayment (such as is the case, for example, with credit lines), banks have a tendency to insure each other less than the socially efficient amount. We show that efficiency can be restored by introducing seniority clauses for interbank claims or through subsidies that resemble government interbank lending guarantees.     

Finding the core: Network structure in interbank markets

This paper investigates the network structure of interbank markets. Using a dataset of interbank exposures in the Netherlands, we corroborate the recent hypothesis that the core periphery model is a ‘stylised fact’ of interbank markets. We find a core of highly connected banks intermediating between periphery banks and pay particular attention to model selection. Our analysis can help improve systemic risk assessments, especially as more granular data is becoming available.     

市场化条件下人民币同业存款的定价策略

随着人民币同业存款利率市场化的逐步推进,人民币同业存款定价策略研究具有重要的现实意义在市场化条件下,商业银行对各种金融产品定价是大趋势。文章结合实际,对人民币同业存款的定价作了策略分析。最后用实例展现了商业银行人民币同业存款定价的过程,并提出了一些值得关注的问题。     

Liquidity Coinsurance and Bank Capital

Banks can deal with their liquidity risk by holding liquid assets (self‐insurance), by participating in interbank markets (coinsurance), or by using flexible financing instruments, such as bank capital (risk sharing). We use a simple model to show that undiversifiable liquidity risk, that is, the liquidity risk that banks are unable to coinsure on interbank markets, represents an important risk factor affecting their capital structures. Banks facing higher undiversifiable liquidity risk hold more capital. We posit that, empirically, banks that are more exposed to undiversifiable liquidity risk are less active on interbank markets. Therefore, we test for the existence of a negative relationship between bank capital and interbank market activity and find support in a large sample of U.S. commercial banks.     

Interbank tiering and money center banks

This paper provides evidence that interbank markets are tiered rather than flat, in the sense that most banks do not lend to each other directly but through money center banks acting as intermediaries. We capture the concept of tiering by developing a core-periphery model, and devise a procedure for fitting the model to real-world networks. Using Bundesbank data on bilateral interbank exposures among 2000 banks from 1999 to 2012, we find strong evidence of tiering in the German banking system. This extent of tiering is unlikely to arise in standard random networks. Indeed, we show that bank specialization and balance sheet variables predict how banks position themselves in the interbank market. This link provides a promising avenue for understanding the formation of financial networks.     

Balancing liquidity and returns through interbank markets: Endogenous interest rates and network structures

In this article, we develop a model of interbank lending based on liquidity and return on equity considerations of homogeneous banks. We derive the reservation prices of interbank lending and its properties before exploring how, because of an idiosyncratic liquidity shock, banks engage in bilateral lending to form an interbank network. We establish that the resulting networks exhibit realistic properties, including a core-periphery structure. Banks in the core and the periphery of this network differ not only in the amounts of interbank lending and borrowing but also in the interest rates applied to their transactions.     

Interbank relationship lending revisited: Are the funds available at a similar price?

Under the market discipline hypothesis, monitoring by interbank lenders may induce changes in either the price or availability of new interbank funds to borrower banks. However, the presence of interbank relationship lending has been evaluated based on the availability of funds only—disregarding their price. We revisit relationship lending in unsecured interbank lending markets by simultaneously evaluating the availability and price of funds. We calculate the survival ratio of networks containing the price of daily interbank lending in Colombia from 2014 to 2020. Under this framework, an interbank relation survives from one day to the next if the funds are available at a price that does not increase too much; that is, either a halt in interbank funding or a sizeable increase in the price of interbank funding mark a break in the relation between two banks. We find that about 38 percent of relations in the Colombian unsecured interbank lending market survive from one day to the next. Therefore, from a comprehensive market discipline perspective, we find evidence of interbank relationship lending in Colombia.     

银行间市场理财产品快速发展的原因及对银行业的影响

在融资类银信合作理财产品监管趋严并受到限制的背景下,投资银行间市场的理财产品快速发展是2011年理财市场的一个重要特点。本文的研究表明：一是在现有经济金融环境下投资者对较高收益率资产的需求与银行之间的存款竞争等多个因素共同促进了银行间市场理财产品的快速发展;二是银行间市场理财产品的发行不会对银行在市场中的地位产生影响,总体上对银行体系的稳定影响有限;三是银行间市场理财产品的发行对银行体系流动性总体有利,但会产生时点上的不利影响,并给中小机构的流动性管理带来压力;四是银行间市场理财产品的发行是一种金融创新．有利于金融机构的长远发展。本文建议：适当提高存款基准利率水平,稳步推进利率市场化;对现有银行间市场理财产品进一步加强监测与规范;在加强监管的前提下,继续鼓励银行金融创新．     

Funding Modes of German Banks: Structural Changes and their Implications

We investigate the funding modes of German banks and the implications for lending and profitability during 1992–2002. We find that at many banks, deposits from customers decrease in relative terms while interbank liabilities increase as a source of funding. We cannot detect a negative impact of the relative decline in deposits on lending. The decreasing ability of banks to collect deposits and the substitution of deposits by interbank liabilities unfavorably affects the net interest result of banks that exhibit a deposit deficit, especially savings banks. Our findings indicate a structural lengthening of the intermediation chain, which has broader implications for the functioning and stability of the financial system.     

Contagion in the interbank market and its determinants

Carrying out interbank contagion simulations for the German banking sector for the period from the first quarter of 2008 to the second quarter of 2011, we obtain the following results: (i) The system becomes less vulnerable to direct interbank contagion over time. (ii) The loss distribution for each point in time can be condensed into one indicator, the expected number of failures, without much loss of information. (iii) Important determinants of this indicator are the banks’ capital, their interbank lending in the system, the loss given default and how equal banks spread their claims among other banks.     

Bank market power,asset liquidity and funding liquidity: International evidence

Our investigation of the association between bank market power and liquidity in 101 countries reveals that a bank's initial gains of market power lead to increases in bank liquidity, but does so at a diminishing rate. Beyond an empirically determined threshold, further increases in market power are inversely associated with bank liquidity. From a cross-sectional viewpoint, banks that lack market power hold more liquid assets and are net lenders in the interbank market. In contrast, dominant banks hold less liquid assets and are net interbank borrowers. For a given level of market power, ceteris paribus, developed nation banks hold less asset liquidity and obtain more interbank funding liquidity than their developing country peers. These results remain equally relevant during the 2007–2009 global financial crisis (GFC).     

Modelling the emergence of the interbank networks

Interbank contagion has become a buzzword in the aftermath of the financial crisis that led to a series of shocks to the interbank market and to periods of pronounced market disruptions. However, little is known about how interbank networks are formed and about their sensitivity to changes in key bank parameters (for example, induced by common exogenous shocks or by regulatory initiatives). This paper aims to shed light on these issues by modelling endogenously the formation of interbank networks, which in turn allows for checking the sensitivity of interbank network structures and hence, their underlying contagion risk to changes in market-driven parameters as well as to changes in regulatory measures such as large exposures limits. The sequential network formation mechanism presented in the paper is based on a portfolio optimization model, whereby banks allocate their interbank exposures while balancing the return and risk of counterparty default risk and the placements are accepted taking into account funding diversification benefits. The model offers some interesting insights into how key parameters may affect interbank network structures and can be a valuable tool for analysing the impact of various regulatory policy measures relating to banks’ incentives to operate in the interbank market.     

我国银行间市场资金面影响因素的探讨——兼对当前市场流动性状况的分析与展望

梳理银行间市场资金面的影响因素，对于分析市场资金面的供求关系，央行评估货币政策执行效果，以及金融机构进行资产组合配置都有积极作用。文章从货币政策、商业银行存贷款增量、央行外汇占款、税收因素等多个角度，梳理了影响我国银行间市场资金面的八项因素，并在此基础上分析了今年5月份以来银行间市场资金面快速趋紧的成因。三季度，受CPI冲高回落、重申人民币汇改以及大型商业银行流动性状况好转等因素影响，银行间市场资金面紧张的格局将逐步改善。     

Banks’ interconnections and peer effects: Evidence from Chile

In this paper, we identify and quantify the importance of endogenous peer effects in the interbank market, allowing for varying degrees of intensity of these peer effects. We base our analysis on a unique dataset that includes all interbank loans that have taken place between 15 banks in the Chilean interbank market representing more than 95% of the market between 2009 and 2016. This approach contrasts sharply with the geographical definition of peers used by most of the literature. As an application of our model, we examine an episode of liquidity shortage experienced by one Chilean bank in the interbank market, with the lenses of our model. We show evidence consistent with a herding behavior of the lender banks which, according to our model, were peers of the stressed bank.