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Interbank netting agreement and the distribution of bank default risk


  • William R. Emmons


Central banks and private banks alike have advocated greater use of interbank netting agreements in recent years in order to reduce potential for transmitting economic shocks through interbank markets. This paper provides a model of an interbank payment market and shows that one sideeffect of greater netting of interbank claims is a redistribution of bank default risk away from interbank claimants toward non-bank creditors of banks, including the deposit insurer. Interbank netting agreements thus involve a trade-off between reduced interbank credit-risk exposure and increased concentration of bank default risk on other sets of bank creditors.

Suggested Citation

  • William R. Emmons, 1995. "Interbank netting agreement and the distribution of bank default risk," Working Papers 1995-016, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:1995-016

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    References listed on IDEAS

    1. Patrick M. Parkinson, 1993. "Systemic risk in interbank markets," Proceedings 400, Federal Reserve Bank of Chicago.
    2. Hugh Cohen & William Roberds, 1993. "Towards the systematic measurement of systemic risk," FRB Atlanta Working Paper 93-14, Federal Reserve Bank of Atlanta.
    3. Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June.
    4. Larry D. Wall, 2010. "Too-big-to-fail after FDICIA," Economic Review, Federal Reserve Bank of Atlanta.
    5. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
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    Cited by:

    1. Degryse, H.A. & Nguyen, G., 2004. "Interbank Exposures : An Empirical Examination of Systemic Risk in the Belgian Banking System," Discussion Paper 2004-4, Tilburg University, Center for Economic Research.
    2. James J. McAndrews, 1997. "Banking and payment system stability in an electronic money world," Working Papers 97-9, Federal Reserve Bank of Philadelphia.
    3. Grégory Nguyen, 2003. "The Belgian Interbank Market: Interbank Linkages and Systemic Risk," Financial Stability Review, National Bank of Belgium, vol. 1(1), pages 105-123, June.
    4. William J. Bergman & Robert R. Bliss & Christian A. Johnson & George G. Kaufman, 2004. "Netting, financial contracts, and banks: the economic implications," Working Paper Series WP-04-02, Federal Reserve Bank of Chicago.
    5. McAndrews, James & Roberds, William, 1999. "A General Equilibrium Analysis of Check Float," Journal of Financial Intermediation, Elsevier, vol. 8(4), pages 353-377, October.
    6. Kahn, Charles M & McAndrews, James & Roberds, William, 2003. " Settlement Risk under Gross and Net Settlement," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 591-608, August.
    7. Bliss, Robert R. & Kaufman, George G., 2006. "Derivatives and systemic risk: Netting, collateral, and closeout," Journal of Financial Stability, Elsevier, vol. 2(1), pages 55-70, April.
    8. JAMES J. McANDREWS, 1999. "E-Money And Payment System Risks," Contemporary Economic Policy, Western Economic Association International, vol. 17(3), pages 348-357, July.
    9. Robert R. Bliss & George G. Kaufman, 2005. "Derivatives and systemic risk: netting, collateral, and closeout," Working Paper Series WP-05-03, Federal Reserve Bank of Chicago.

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