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Macroprudential Consolidation Policy in Interbank Networks

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  • Edoardo Gaffeo

    ()

  • Massimo Molinari

    ()

Abstract

Can consolidation policy be made consistent with macro-prudential supervision? In this study, we seek to provide new insights on this key-question using a network approach. We study how the resilience of a banking network evolves as we shock an initially homogenous competitive market with a sequence of M&A activities that significantly alter the topology of the network. We study how different M&A treatments impact on the structural vulnerabilities that can propagate through the system and we show that the severity of contagion and default dynamics depends on the chosen treatment. The desirability of alternative competitive settings (such as hub-centered market or a more concentrated and yet symmetric market) are assessed against an homogenous benchmark case and we show that the choice depends crucially on the size of the interbank market and the level of bank capitalization. The existence of a large highly connected hub is beneficial in a capitalized network with a well-developed interbank market but it can significantly weaken the system resilience in a poorly capitalized market. Antitrust and competition authorities shall adopt a state-contingent approach to M&A activities according to the market conditions in which banks operate.

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Bibliographic Info

Paper provided by Department of Economics and Management in its series DEM Discussion Papers with number 2014/01.

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Date of creation: 2014
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Handle: RePEc:trn:utwpem:2014/01

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Keywords: Consolidation Policy; Macroprudential Regulation; Interbank Networks;

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  1. Yaron Leitner, 2005. "Financial Networks: Contagion, Commitment, and Private Sector Bailouts," Journal of Finance, American Finance Association, American Finance Association, vol. 60(6), pages 2925-2953, December.
  2. Xavier Vives, 2011. "Competition and Stability in Banking," Central Banking, Analysis, and Economic Policies Book Series, in: Luis Felipe Céspedes & Roberto Chang & Diego Saravia (ed.), Monetary Policy under Financial Turbulence, edition 1, volume 16, chapter 12, pages 455-502 Central Bank of Chile.
  3. Allen Berger & Leora Klapper & Rima Turk-Ariss, 2009. "Bank Competition and Financial Stability," Journal of Financial Services Research, Springer, Springer, vol. 35(2), pages 99-118, April.
  4. Battiston, Stefano & Gatti, Domenico Delli & Gallegati, Mauro & Greenwald, Bruce & Stiglitz, Joseph E., 2012. "Default cascades: When does risk diversification increase stability?," Journal of Financial Stability, Elsevier, Elsevier, vol. 8(3), pages 138-149.
  5. Joon‐Ho Hahm & Hyun Song Shin & Kwanho Shin, 2013. "Noncore Bank Liabilities and Financial Vulnerability," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 45, pages 3-36, 08.
  6. Edoardo Gaffeo & Massimo Molinari, 2013. "Interbank contagion and resolution procedures: inspecting the mechanism," DEM Discussion Papers, Department of Economics and Management 2013/09, Department of Economics and Management.
  7. Krause, Andreas & Giansante, Simone, 2012. "Interbank lending and the spread of bank failures: A network model of systemic risk," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 83(3), pages 583-608.
  8. Gai, Prasanna & Kapadia, Sujit, 2010. "Contagion in financial networks," Bank of England working papers 383, Bank of England.
  9. Gai, Prasanna & Haldane, Andrew & Kapadia, Sujit, 2011. "Complexity, concentration and contagion," Journal of Monetary Economics, Elsevier, Elsevier, vol. 58(5), pages 453-470.
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