A model of network formation for the overnight interbank market: When is core-periphery an illusion?

We develop a theoretical model of network formation in the overnight interbank market, where banks manage liquidity under reserve uncertainty by strategically forming bilateral lending relationships. The model incorporates counterparty risk and the central bank’s corridor system, yielding endogenously determined equilibrium networks. A key result, relevant for systemic stability policy, is that the equilibrium network is bipartite: active banks act either as lenders or borrowers, and no strategic (interbank) intermediation arises. We also show that, via temporal aggregation of equilibrium networks, apparent intermediation and a core-periphery structure emerge. We validate these predictions using e-MID market data, showing that the model reconciles the frequency-dependent network features documented in the empirical literature for this market.