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Peer monitoring or contagion? Interbank market exposure and bank risk

Author

Listed:
  • F.R. Liedorp
  • L. Medema
  • M. Koetter
  • R.H. Koning
  • I. van Lelyveld

Abstract

We test if interconnectedness in the interbank market is a channel through which banks affect each others riskiness. The evidence is based on quarterly bilateral exposures of all banks active in the Dutch interbank market between 1998 and 2008. A spatial lag model, borrowed from regional science, is used to test if z -scores of other banks affect individual bank's z -scores through the network of the interbank market. Larger dependence on interbank borrowing and lending increases bank risk. But only interbank funding exposures to other banks in the system exhibit significant spill-over coefficients. Spatial lags for lending are insignificant while borrowing from other banks reduces individual bank risk if neighbors are stable, too. Vice versa, stability shocks at interbank counterparties in the system spill over through the liability side of banks balance sheets.

Suggested Citation

  • F.R. Liedorp & L. Medema & M. Koetter & R.H. Koning & I. van Lelyveld, 2010. "Peer monitoring or contagion? Interbank market exposure and bank risk," DNB Working Papers 248, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:248
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    File URL: https://www.dnb.nl/binaries/248%20Peer%20monitoring%20or%20contagion_tcm46-233692.pdf
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    Cited by:

    1. Elahi, M.A., 2011. "Essays on financial fragility," Other publications TiSEM 882f55bb-10dc-4e49-95ef-e, Tilburg University, School of Economics and Management.
    2. in ’t Veld, Daan & van Lelyveld, Iman, 2014. "Finding the core: Network structure in interbank markets," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 27-40.
    3. Andrievskaya, Irina & Semenova, Maria, 2013. "Market discipline and the Russian interbank market," BOFIT Discussion Papers 29/2013, Bank of Finland, Institute for Economies in Transition.
    4. Bhaskar DasGupta & Lakshmi Kaligounder, 2014. "Densely Entangled Financial Systems," Papers 1402.5208, arXiv.org.
    5. repec:mes:eaeuec:v:53:y:2015:i:2:p:69-98 is not listed on IDEAS
    6. Piotr Berman & Bhaskar DasGupta & Lakshmi Kaligounder & Marek Karpinski, 2011. "On the Computational Complexity of Measuring Global Stability of Banking Networks," Papers 1110.3546, arXiv.org, revised Mar 2013.
    7. Agur, Itai, 2014. "Bank risk within and across equilibria," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 322-333.
    8. de Haan, Leo & van den End, Jan Willem, 2013. "Bank liquidity, the maturity ladder, and regulation," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3930-3950.
    9. Tonzer, Lena, 2015. "Cross-border interbank networks, banking risk and contagion," Journal of Financial Stability, Elsevier, vol. 18(C), pages 19-32.
    10. Zlatuse Komarkova & Adam Gersl & Lubos Komarek, 2011. "Models for Stress Testing Czech Banks' Liquidity Risk," Working Papers 2011/11, Czech National Bank, Research Department.
    11. Kuo, Dennis & Skeie, David R. & Vickery, James & Youle, Thomas, 2013. "Identifying term interbank loans from Fedwire payments data," Staff Reports 603, Federal Reserve Bank of New York, revised 01 Aug 2014.
    12. de Haan, Leo & van den End, Jan Willem, 2013. "Banks’ responses to funding liquidity shocks: Lending adjustment, liquidity hoarding and fire sales," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 152-174.
    13. Tovar-García, Edgar Demetrio, 2016. "Who can better monitor a bank than another bank? Mechanisms of discipline in the Mexican interbank market ||¿Quién mejor que un banco para monitorear otro banco? Mecanismos de disciplina en el mercado," Revista de Métodos Cuantitativos para la Economía y la Empresa = Journal of Quantitative Methods for Economics and Business Administration, Universidad Pablo de Olavide, Department of Quantitative Methods for Economics and Business Administration, vol. 21(1), pages 205-229, June.
    14. Craig, Ben R. & Koetter, Michael & Kruger, Ulrich, 2014. "Interbank Lending and Distress: Observables, Unobservables, and Network Structure," Working Paper 1418, Federal Reserve Bank of Cleveland.
    15. Francesco Palazzo, 2016. "Peer monitoring via loss mutualization," Temi di discussione (Economic working papers) 1088, Bank of Italy, Economic Research and International Relations Area.
    16. Andrievskaya & Semenova, 2015. "Market Discipline in the Interbank Market: Evidence from Russia," Eastern European Economics, Taylor & Francis Journals, vol. 53(2), pages 69-98, March.

    More about this item

    Keywords

    Interbank market; bank risk; spatial lag model;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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