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Network efficiency and the banking system

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  • Nicola Giocoli

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Abstract

Inspired by the Coasean “market versus firm” dichotomy, we offer a new definition of efficiency by applying the notions of network cost and network efficiency as developed in complex network theory. Network analysis is relevant for every system of interconnected exchanging agents. One such system is the banking sector. It is showed that the notions hereby presented may improve upon the results of Allen and Gale’s standard model of the interbank market, where banks exchange liquidity and where troubles in a region of the market may lead to systemic collapse. Copyright Springer-Verlag Berlin Heidelberg 2014

Suggested Citation

  • Nicola Giocoli, 2014. "Network efficiency and the banking system," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 61(3), pages 203-218, September.
  • Handle: RePEc:spr:inrvec:v:61:y:2014:i:3:p:203-218
    DOI: 10.1007/s12232-014-0212-x
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    File URL: http://hdl.handle.net/10.1007/s12232-014-0212-x
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    References listed on IDEAS

    as
    1. Julio J. Rotemberg, 2008. "Liquidity Needs in Economies with Interconnected Financial Obligations," NBER Working Papers 14222, National Bureau of Economic Research, Inc.
    2. Ricardo J. Caballero, 2010. "Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome," Journal of Economic Perspectives, American Economic Association, vol. 24(4), pages 85-102, Fall.
    3. Iori, Giulia & De Masi, Giulia & Precup, Ovidiu Vasile & Gabbi, Giampaolo & Caldarelli, Guido, 2008. "A network analysis of the Italian overnight money market," Journal of Economic Dynamics and Control, Elsevier, vol. 32(1), pages 259-278, January.
    4. Nier, Erlend & Yang, Jing & Yorulmazer, Tanju & Alentorn, Amadeo, 2007. "Network models and financial stability," Journal of Economic Dynamics and Control, Elsevier, vol. 31(6), pages 2033-2060, June.
    5. Caldarelli, Guido, 2007. "Scale-Free Networks: Complex Webs in Nature and Technology," OUP Catalogue, Oxford University Press, number 9780199211517.
    6. Iori, Giulia & Jafarey, Saqib & Padilla, Francisco G., 2006. "Systemic risk on the interbank market," Journal of Economic Behavior & Organization, Elsevier, vol. 61(4), pages 525-542, December.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Network theory; Efficiency; Banking system; Systemic risk; D23; D85; G01; G21;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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