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The interbank market puzzle


  • Allen, Franklin
  • Covi, Giovanni
  • Gu, Xian
  • Kowalewski, Oskar
  • Montagna, Mattia


This study documents significant differences in the interbank market lending and borrowing levels across countries. We argue that the existing differences in interbank market usage can be explained by the trust of the market participants in the stability of the country’s banking sector and counterparties, proxied by the history of banking crises and failures. Specifically, banks originating from a country that has lower level of trust tend to have lower interbank borrowing. Using a proprietary dataset on bilateral exposures, we investigate the Euro Area interbank network and find the effect of trust relies on the network structure of interbank markets. Core banks acting as interbank intermediaries in the network are more significantly influenced by trust in obtaining interbank funding, while being more exposed in a community can mitigate the negative effect of low trust. Country-level institutional factors might partially substitute for the limited trust and enhance interbank activity. JEL Classification: G01, G21, G28, D85

Suggested Citation

  • Allen, Franklin & Covi, Giovanni & Gu, Xian & Kowalewski, Oskar & Montagna, Mattia, 2020. "The interbank market puzzle," Working Paper Series 2374, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20202374
    Note: 2330794

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    Cited by:

    1. HORIKAWA Takumi & MATSUI Yujiro & GEMMA Yasufumi, 2021. "A Network Analysis of the JGB Repo Market," Bank of Japan Working Paper Series 21-E-14, Bank of Japan.
    2. Harrison, Michael & Nakajima, Jouchi & Shabani, Mimoza, 2022. "An evolution of global and regional banking networks: A focus on Japanese banks’ international expansion," Discussion paper series HIAS-E-120, Hitotsubashi Institute for Advanced Study, Hitotsubashi University.
    3. Angelo D'Andrea & Nicola Limodio, 2019. "High-Speed Internet, Financial Technology and Banking in Africa," BAFFI CAREFIN Working Papers 19124, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    4. Edoardo Gaffeo & Lucio Gobbi & Massimo Molinari, 2019. "Liquidity contagion with a “first-in/first-out†seniority of claims," Economics Bulletin, AccessEcon, vol. 39(4), pages 2572-2579.
    5. Anastasios Demertzidis, 2019. "Interbank transactions on the intraday frequency: -Different market states and the effects of the financial crisis-," MAGKS Papers on Economics 201932, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

    More about this item


    centrality; community detection; interbank market; networks; trust;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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