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Relationships in the Interbank Market

Author

Listed:
  • Jonathan Chiu

    (Bank of Canada)

  • Jens Eisenschmidt

    (European Central Bank)

  • Cyril Monnet

    (University of Bern)

Abstract

The market for central bank reserves is mainly over-the-counter and exhibits a core-periphery network structure. This paper develops a model of relationship lending in the unsecured interbank market. Banks choose to build relationships in order to insure against liquidity shocks and to economize on the cost to trade in the interbank market. Relationships can explain some anomalies in the level of interest rates – e.g., the fact that banks sometimes trade below the central bank's deposit rate, as we find using data from the ECB. The model also helps understand how monetary policy affects the network structure of the interbank market and its functioning. (Copyright: Elsevier)

Suggested Citation

  • Jonathan Chiu & Jens Eisenschmidt & Cyril Monnet, 2020. "Relationships in the Interbank Market," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 170-191, January.
  • Handle: RePEc:red:issued:18-238
    DOI: 10.1016/j.red.2019.06.003
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    Cited by:

    1. Chen, Bing & Li, Li & Peng, Fei & Anwar, Sajid, 2020. "Risk contagion in the banking network: New evidence from China," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    2. Puriya Abbassi & Falk Bräuning & Niels Schulze, 2021. "Bargaining power and outside options in the interbank lending market," Financial Management, Financial Management Association International, vol. 50(2), pages 553-586, June.
    3. Altavilla, Carlo & Boucinha, Miguel & Burlon, Lorenzo & Giannetti, Mariassunta & Schumacher, Julian, 2022. "Money markets and bank lending: evidence from the adoption of tiering," Working Paper Series 2649, European Central Bank.
    4. Jonathan Chiu & Jens Eisenschmidt & Cyril Monnet, 2020. "Relationships in the Interbank Market," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 170-191, January.
    5. Chotipong Charoensom & Thaisiri Watewai, 2022. "Optimal Liquidity Control and Systemic Risk in an Interbank Network with Liquidity Shocks and Regime-dependent Interconnectedness," PIER Discussion Papers 175, Puey Ungphakorn Institute for Economic Research.
    6. Jonathan Chiu & Jens Eisenschmidt & Cyril Monnet, 2020. "Relationships in the Interbank Market," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 170-191, January.
    7. Heon Lee, 2021. "Money Creation and Banking: Theory and Evidence," Papers 2109.15096, arXiv.org.
    8. Chukwudi Henry Dike, 2020. "Strategic Interactions in Financial Networks," 2020 Papers pdi579, Job Market Papers.
    9. Ardekani, Aref Mahdavi & Distinguin, Isabelle & Tarazi, Amine, 2020. "Do banks change their liquidity ratios based on network characteristics?," European Journal of Operational Research, Elsevier, vol. 285(2), pages 789-803.
    10. Sylvia Xiao & Randall Wright & Guillaume Rocheteau, 2017. "Open Market Operations," 2017 Meeting Papers 345, Society for Economic Dynamics.
    11. Brassil, Anthony & Nodari, Gabriela, 2021. "A Density-Based estimator of core/periphery network structures," Journal of Banking & Finance, Elsevier, vol. 125(C).

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    More about this item

    Keywords

    Relationships; Interbank market; Core-periphery; Networks; Corridor system;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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