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Interbank market failure and macro-prudential policies

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  • Corrado, Luisa
  • Schuler, Tobias

Abstract

This paper analyses the effects of several macro-prudential policy measures on the banking sector and its linkages to the macroeconomy. We employ a dynamic general equilibrium model with sticky prices, in which banks trade excess funds in the interbank lending market. We find that an increase in the liquidity requirement effectively reduces the impact of an interbank shock on the real and financial sector, while an increased capital requirement propagates only through nominal variables as inflation and interest rates. We conclude that stricter liquidity measures which limit inside money creation, dampen the severity of a breakdown in interbank lending. Targeting interbank financing directly through liquidity measures along with a moderate capital requirement generates lower welfare losses. We thereby provide a comprehensive rationale in favor of the regulatory measures in Basel III.

Suggested Citation

  • Corrado, Luisa & Schuler, Tobias, 2017. "Interbank market failure and macro-prudential policies," Journal of Financial Stability, Elsevier, vol. 33(C), pages 133-149.
  • Handle: RePEc:eee:finsta:v:33:y:2017:i:c:p:133-149
    DOI: 10.1016/j.jfs.2016.10.007
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    Cited by:

    1. Giri, Federico, 2018. "Does interbank market matter for business cycle fluctuation? An estimated DSGE model with financial frictions for the Euro area," Economic Modelling, Elsevier, vol. 75(C), pages 10-22.
    2. Mohammad Taqiuddin Mohamad & Ahmad Azam Sulaiman & Meguellati Achour, 2020. "Exposure to interbank investment and financing risk by Islamic banks: a dynamic panel analysis of Malaysia," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing, vol. 14(1), pages 1-15, November.
    3. Luisa Corrado & Tobias Schuler, 2018. "Financial Bubbles in Interbank Lending," ifo Working Paper Series 260, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    4. Alin-Marius Andries & Florentina Melnic & Simona Nistor, 2018. "Effects of Macroprudential Policy on Systemic Risk and Bank Risk Taking," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 68(3), pages 202-244, July.
    5. Cristian ANGHEL, 2019. "Risk management associated with the interbank relationships," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(3(620), A), pages 87-98, Autumn.
    6. Luisa Corrado & Tobias Schuler, 2018. "Financial Cycles, Credit Bubbles and Stabilization Policies," CESifo Working Paper Series 7422, CESifo.
    7. Shanshan Jiang & Hong Fan, 2019. "Systemic Risk in the Interbank Market with Overlapping Portfolios," Complexity, Hindawi, vol. 2019, pages 1-12, April.

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    More about this item

    Keywords

    Macro-prudential policies; Interbank market; Liquidity ratio; Capital ratio;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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