Lending-of-last-resort is as lending-of-last-resort does: Central bank liquidity provision and interbank market functioning in the euro area

This paper investigates the impact of ample liquidity provision by the European Central Bank on the functioning of the overnight unsecured interbank market from 2008 to 2014. We use novel data on interbank transactions derived from TARGET2, the main euro area payment system. To identify exogenous shocks to central bank liquidity, we exploit the timing of ECB liquidity operations and use a simple structural vector auto-regression framework. We argue that the ECB acted as a de facto lender-of-last-resort to the euro area banking system and identify two main effects of central bank liquidity provision on interbank markets. First, central bank liquidity replaces the demand for liquidity in the interbank market, especially during the financial crisis (2008–2010). Second, it increases the supply of liquidity in the interbank market in stressed countries (Greece, Italy and Spain) during the sovereign debt crisis (2011–2013).     

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.     

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.     

Interbank interest rates: Funding liquidity risk and XIBOR basis spreads

This article presents a theoretical model for interbank money market (XIBOR) rates that endogenously generates the basis spreads that characterize post-crisis fixed income markets: XIBOR-OIS spreads, tenor basis spreads, and the forward basis. Our approach is based on an explicit modeling of interbank cash transactions where interbank credit and liquidity risk are factored in. The framework of this article offers a consistent, arbitrage-free explanation for the emergence of basis spreads. We also demonstrate that funding liquidity is a key determinant of post-crisis XIBOR rates and, in particular, tenor basis spreads.     

Correlated bank runs,interbank markets and reserve requirements

This article extends the application of global games of Goldstein and Pauzner (2005) in the banking model of Diamond and Dybvig (1983) to account for correlation in the quality of banks’ long term investment, when banks are linked through cross deposits and there is a central bank. The goal is to study how these elements affect the deposit contract that banks offer to depositors and the ex ante probability of a bank run. We show that the coexistence of a central bank, which determines banks’ reserve requirements, and an interbank market, which redistributes reserves, leads to a smaller probability of a bank run and to fewer inefficient bank runs, relative to the case with no central bank and no interbank market. By adequately choosing the level of reserves to store, the central bank can improve the equilibrium outcome and allow banks to offer a higher interim payment to depositors, relative to the situation with no cross deposits.     

Investigating risk contagion initiated by endogenous liquidity shocks: evidence from the US and eurozone interbank markets

This paper investigates liquidity spillovers between the US and European interbank markets during turbulent and tranquil periods. We show that an endogenous model with time-varying transition probabilities is effective in describing the propagation of liquidity shocks within the interbank market, while predicting liquidity crashes characterised by changed dynamics. We show that liquidity shocks, originating from movements of the spread between the Asset Backed Commercial Paper and T-bill, drive regime changes in the euro fixed-float OIS swap rate. Our results support the idea of endogenous contagion from the US money market to the eurozone money market during the global financial crisis.     

Structure in the Italian overnight loan market

We analyze the Italian interbank loan market from 1999 until 2010. The analysis of net trade flows shows a high imbalance caused by a few large net borrowers in the market. The trading volume shows a significant drop starting in 2007, which accelerates with the Lehman default in late 2008. The interbank loan network is very dense. Hence, we try to identify strong links by looking for preferential lending relationships expressed by discounts in the loan rate. Furthermore, we estimate the dynamics of credit spreads for each bank and find that economically significant spreads for the overnight market developed only in 2010. The analysis of preferential loan relationships reveals that in the pre-Lehman era large net borrowers used to borrow at a slight discount. In the post-Lehman era borrowers with large net exposures paid more than the average market rate, which shows that the risk evaluation of market participants has changed considerably.     

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.     

Money and liquidity in financial markets

We argue that there is a connection between the interbank market for liquidity and the broader financial markets, which has its basis in demand for liquidity by banks. Tightness in the market for liquidity leads banks to engage in what we term “liquidity pull-back,” which involves selling financial assets either by banks directly or by levered investors. Empirical tests on the stock market are supportive. Tighter interbank markets are associated with relatively more volume in more liquid stocks; selling pressure, especially in more liquid stocks; and transitory negative returns. We control for market-wide uncertainty and in the process also contribute to the literature on portfolio rebalancing. Our general point is that money matters in financial markets.     

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.     

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.     

International business: determinants of interbank activities

This paper investigates the determinants of the international interbank market, a significant component of international trade in financial services. The sample encompasses both monthly and quarterly data from 1983 to 1993. The superiority of the monthly results suggest that the interbank market should be modelled within a short-term framework. This data interval captures the short-term movement of funds between currencies, Eurobonds, the nonbank market and the domestic banking market by banks to maximize returns. Moreover, the interbank market does not necessarily move in line with fundamental trade and income variables. Rather, the market is sensitive to return differentials, the relative cost of capital, the yield curve and international nonbank assets. The empirical results also indicate that nationality remains important in interbank trading because of the advantages it imparts on the home country in dealing in its home currency, particularly if that currency is a vehicle currency.     

第二代“泛欧实时全额自动结算系统”的运行机制及启示

TARGET2系统是目前全球最主要的欧元结算系统,主要是为满足欧元推出后,统一欧元区内各国支付体系、提高欧元支付效率与安全性、便利单一货币政策实施需要,于2007年正式推出,也是TARGET系统的升级版。该系统具有开放性特点,且比较安全稳定。随着欧债危机不断恶化,TARGET2系统设计缺陷也开始显现。但该系统确实是不同主权国家共用同一支付结算系统的一种积极探索,对推动人民币跨境使用、促进亚洲区域金融一体化,具有重要启示意义。     

On the determinants of bank interest margins under credit and interest rate risks

This paper explores the determinants of optimal bank interest margins based on a simple firm-theoretical model under multiple sources of uncertainty and risk aversion. The model demonstrates how cost, regulation, credit risk and interest rate risk conditions jointly determine the optimal bank interest margin decision. We find that the bank interest margin is positively related to the bank's market power, to the operating costs, to the degree of credit risk, and to the degree of interest rate risk. An increase in the bank's equity capital has a negative effect on the spread when the bank faces little interest rate risk. The effect of rising interbank market rate on the spread is ambiguous and depends on the net position of the bank in the interbank market. Our findings provide alternative explanations for the empirical evidence concerning bank spread behavior.     

Modelling Deposit Insurance Scheme Losses in a Basel 2 Framework

This paper extends the existing literature on deposit insurance by proposing a new approach for the estimation of the loss distribution of a Deposit Insurance Scheme (DIS) that is based on the Basel 2 regulatory framework. In particular, we generate the distribution of banks’ losses following the Basel 2 theoretical approach and focus on the part of this distribution that is not covered by capital (tail risk). We also refine our approach by considering two major sources of systemic risks: the correlation between banks’ assets and interbank lending contagion. The application of our model to 2007 data for a sample of Italian banks shows that the target size of the Italian deposit insurance system covers up to 98.96% of its potential losses. Furthermore, it emerges that the introduction of bank contagion via the interbank lending market could lead to the collapse of the entire Italian banking system. Our analysis points out that the existing Italian deposit insurance system can be assessed as adequate only in normal times and not in bad market conditions with substantial contagion between banks. Overall, we argue that policy makers should explicitly consider the following when estimating DIS loss distributions: first, the regulatory framework within which banks operate such as (Basel 2) capital requirements; and, second, potential sources of systemic risk such as the correlation between banks’ assets and the risk of interbank contagion.     

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).     

Assessing systemic risk using interbank exposures in the global banking system

This paper contributes to the literature on systemic risk by examining the network structure of bilateral exposures in the global banking system. The global interbank market constitutes a major part of the global banking system. The market has a hierarchical network structure, composed of the national or jurisdictional area's local markets and the cross-border interbank market. First, we estimate the bilateral exposures matrix using aggregate financial data on loans and deposits from Bankscope and analyze the interconnectedness in the market using network centrality measures. Subsequently, for the model analysis, we apply the Eisenberg–Noe framework to a multi-period setting. In this framework, bank defaults are classified into stand-alone defaults and contagious defaults. The banks in our sample (i.e., the top 202 banks with more than $50 billion in total assets) comprise a major part of this global banking system. The main findings are as follows: The theoretical network analysis using network centrality measures showed that most of the banks designated as global systemically important banks (G-SIBs) play a central role in the global interbank market. The theoretical default analysis showed a few contagious defaults triggered by the basic defaults during and after the global financial crisis. Our stress test proved that many G-SIBs theoretically caused 1–6 contagious defaults. Our methodology would assist in the development of a monitoring system by the respective supervisory authorities as well as in the implementation of bank-internal stress tests of default contagion.     

Why Does the Interest Rate Decline Over the Day? Evidence from the Liquidity Crisis

We provide a simple model, able to explain why the overnight (ON) rate follows a downward intraday pattern, implicitly creating a positive intraday interest rate. While this normally reflects only some frictions, a liquidity crisis introduces a new component: the chance of an upward jump of the ON rate, which must be compensated by an intraday decline of the ON rate. By analyzing real time data for the e-MID interbank market, we show that the intraday rate has increased from a negligible level to a significant one after the start of the liquidity crisis in August 2007, and even more so since September 2008. The intraday rate is affected by the likelihood of a dry-up of the ON market, proxied by the 3M Euribor—Eonia swap spread. This evidence supports our model and it shows that a liquidity crisis impairs the ability of central banks to curb the market price of intraday liquidity, even by providing free daylight overdrafts. Such results have implications for the efficiency of the money market and of payment systems, as well as for the operational framework of central banks.     

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。     

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.