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Interbank netting agreement and the distribution of bank default risk

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  • William R. Emmons

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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File URL: http://research.stlouisfed.org/wp/more/1995-016/
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Bibliographic Info

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

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  1. Hugh Cohen & William Roberds, 1993. "Towards the systematic measurement of systemic risk," Working Paper 93-14, Federal Reserve Bank of Atlanta.
  2. Patrick M. Parkinson, 1993. "Systemic risk in interbank markets," Proceedings 400, Federal Reserve Bank of Chicago.
  3. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  4. Larry D. Wall, 1993. "Too-big-to-fail after FDICIA," Economic Review, Federal Reserve Bank of Atlanta, issue Jan, pages 1-14.
  5. 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.
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Citations

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Cited by:
  1. James McAndrews, 1997. "Banking and payment system stability in an electronic money world," Working Papers 97-9, Federal Reserve Bank of Philadelphia.
  2. Charles M. Kahn & James McAndrews & William Roberds, 1999. "Settlement risk under gross and net settlement," Working Paper 99-10, Federal Reserve Bank of Atlanta.
  3. James McAndrews & William Roberds, 1999. "A general equilibrium analysis of check float," Staff Reports 84, Federal Reserve Bank of New York.
  4. Degryse, H.A. & Nguyen, G., 2004. "Interbank Exposures: An Empirical Examination of Systemic Risk in the Belgian Banking System," Discussion Paper 2004-4, Tilburg University, Center for Economic Research.
  5. Bliss, Robert R. & Kaufman, George G., 2006. "Derivatives and systemic risk: Netting, collateral, and closeout," Journal of Financial Stability, Elsevier, vol. 2(1), pages 55-70, April.
  6. 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.
  7. 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.

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