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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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    File URL: http://dx.doi.org/10.1016/j.red.2019.06.003
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    References listed on IDEAS

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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. 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.
    3. Chukwudi Henry Dike, 2020. "Strategic Interactions in Financial Networks," 2020 Papers pdi579, Job Market Papers.
    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. Sylvia Xiao & Randall Wright & Guillaume Rocheteau, 2017. "Open Market Operations," 2017 Meeting Papers 345, Society for Economic Dynamics.
    6. 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.

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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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