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A network view on interbank market freezes

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  • S. Gabrieli
  • C.-P. Georg

Abstract

We study the liquidity allocation among European banks around the Lehman Brothers’ insolvency using a novel dataset of all interbank loans settled via the Eurosystem’s payment system TARGET2. Following the Lehman insolvency, lenders in the overnight segment become sensitive to counterparty characteristics and banks start hoarding liquidity by shortening the maturity of their interbank lending. This aggregate change in liquidity reallocation is accompanied by a substantial structural change that can best be characterized as a shrinking of the interbank network. Such a change is consequential: banks with higher centrality within the network have better access to liquidity and are able to charge larger intermediation spreads. Therefore, we show the existence of a sizeable interbank lending channel.

Suggested Citation

  • S. Gabrieli & C.-P. Georg, 2014. "A network view on interbank market freezes," Working papers 531, Banque de France.
  • Handle: RePEc:bfr:banfra:531
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    More about this item

    Keywords

    Interbank loans; network topology; financial stability.;
    All these keywords.

    JEL classification:

    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G1 - Financial Economics - - General Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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