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The interbank market puzzle

Author

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

Abstract

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. 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

    Keywords

    centrality; community detection; interbank market; networks; trust;

    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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