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Interbank netting agreement and the distribution of bank default risk

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Author Info
William R. Emmons

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Abstract

Central banks and private banks alike have advocated greater use of interbank netting agreements in recent years in order to reduce potential for transmitting economic shocks through interbank markets. This paper provides a model of an interbank payment market and shows that one sideeffect of greater netting of interbank claims is a redistribution of bank default risk away from interbank claimants toward non-bank creditors of banks, including the deposit insurer. Interbank netting agreements thus involve a trade-off between reduced interbank credit-risk exposure and increased concentration of bank default risk on other sets of bank creditors.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1995-016.

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Date of creation: 1995
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Handle: RePEc:fip:fedlwp:1995-016

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Keywords: Deposit insurance;

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Hugh Cohen & William Roberds, 1993. "Towards the systematic measurement of systemic risk," Working Paper 93-14, Federal Reserve Bank of Atlanta.
  2. Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June. [Downloadable!] (restricted)
  3. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Blackwell Publishing, vol. 51(3), pages 393-414, July. [Downloadable!] (restricted)
  4. Larry D. Wall, 1993. "Too-big-to-fail after FDICIA," Economic Review, Federal Reserve Bank of Atlanta, issue Jan, pages 1-14.
  5. Patrick M. Parkinson, 1993. "Systemic risk in interbank markets," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 62-70.
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Charles M. Kahn & James McAndrews & William Roberds, 1999. "Settlement risk under gross and net settlement," Working Paper 99-10, Federal Reserve Bank of Atlanta. [Downloadable!]
    Other versions:
  2. Robert R. Bliss & George Kaufman, 2005. "Derivatives and systemic risk: netting, collateral, and closeout," Working Paper Series WP-05-03, Federal Reserve Bank of Chicago. [Downloadable!]
  3. William Bergman & Robert Bliss & Christian Johnson & George Kaufman, 2004. "Netting, financial contracts, and banks: the economic implications," Working Paper Series WP-04-02, Federal Reserve Bank of Chicago. [Downloadable!]
  4. James McAndrews & William Roberds, 1999. "A general equilibrium analysis of check float," Staff Reports 84, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  5. James McAndrews, 1997. "Banking and payment system stability in an electronic money world," Working Papers 97-9, Federal Reserve Bank of Philadelphia. [Downloadable!]
  6. Degryse, H.A. & Nguyen, G., 2004. "Interbank exposures : an empirical examination of systemic risk in the Belgian banking system," Discussion Paper 4, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
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