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Static and dynamic networks in interbank markets

Author

Listed:
  • Ethan Cohen-Cole
  • Eleonora Patacchini

    (IZA - Forschungsinstitut zur Zukunft der Arbeit - Institute of Labor Economics, Kiel Institute for the World Economy - Kiel Institute for the World Economy, CEPR - Center for Economic Policy Research)

  • Yves Zenou

    (GAINS - ARGUMANS - Atelier De Recherche En Gestion De L'université Du Mans - GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - UM - Le Mans Université)

Abstract

This paper proposes a model of network interactions in the interbank market. Our innovation is to model systemic risk in the interbank network as the propagation of incentives or strategic behavior rather than the propagation of losses after default. Transmission in our model is not based on default. Instead, we explain bank profitability based on competition incentives and the outcome of a strategic game. As competitors' lending decisions change, banks adjust their own decisions as a result: generating a "transmission" of shocks through the system. We provide a unique equilibrium characterization of a static model, and embed this model into a full dynamic model of network formation. We also determine the key bank, which is the bank that is crucial for the stability of the financial network.

Suggested Citation

  • Ethan Cohen-Cole & Eleonora Patacchini & Yves Zenou, 2015. "Static and dynamic networks in interbank markets," Post-Print hal-04329644, HAL.
    • Handle: RePEc:hal:journl:hal-04329644
    DOI: 10.1017/nws.2015.1
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    Cited by:

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    2. Aldasoro, Iñaki & Alves, Iván, 2018. "Multiplex interbank networks and systemic importance: An application to European data," Journal of Financial Stability, Elsevier, vol. 35(C), pages 17-37.
    3. Sydow, Matthias & Schilte, Aurore & Covi, Giovanni & Deipenbrock, Marija & Del Vecchio, Leonardo & Fiedor, Pawel & Fukker, Gábor & Gehrend, Max & Gourdel, Régis & Grassi, Alberto & Hilberg, Björn & Ka, 2024. "Shock amplification in an interconnected financial system of banks and investment funds," Journal of Financial Stability, Elsevier, vol. 71(C).
    4. Bhattacharya, Mita & Inekwe, John Nkwoma & Valenzuela, Maria Rebecca, 2018. "Financial integration in Africa: New evidence using network approach," Economic Modelling, Elsevier, vol. 72(C), pages 379-390.
    5. in 't Veld, Daan & van der Leij, Marco & Hommes, Cars, 2020. "The formation of a core-periphery structure in heterogeneous financial networks," Journal of Economic Dynamics and Control, Elsevier, vol. 119(C).
    6. Zenou, Yves, 2014. "Key Players," CEPR Discussion Papers 10277, C.E.P.R. Discussion Papers.
    7. Zappa, Paola & Vu, Duy Q., 2021. "Markets as networks evolving step by step: Relational Event Models for the interbank market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 565(C).
    8. Yongli Li & Guanghe Liu & Paolo Pin, 2018. "Network-based risk measurements for interbank systems," PLOS ONE, Public Library of Science, vol. 13(7), pages 1-18, July.
    9. Elliott, Matthew & Georg, Co-Pierre & Hazell, Jonathon, 2021. "Systemic risk shifting in financial networks," Journal of Economic Theory, Elsevier, vol. 191(C).
    10. Ushchev, Philip & Zenou, Yves, 2018. "Price competition in product variety networks," Games and Economic Behavior, Elsevier, vol. 110(C), pages 226-247.
    11. Elliott, Matthew & Georg, Co-Pierre & Hazell, Jonathon, 2021. "Systemic risk shifting in financial networks," LSE Research Online Documents on Economics 123924, London School of Economics and Political Science, LSE Library.
    12. Hüser, Anne-Caroline, 2016. "Too interconnected to fail: A survey of the Interbank Networks literature," SAFE Working Paper Series 91, Leibniz Institute for Financial Research SAFE, revised 2016.
    13. Timo Hiller, 2017. "Too Big to Jail? Key-Player Policies When the Network is Endogenous," Bristol Economics Discussion Papers 17/693, School of Economics, University of Bristol, UK.
    14. John Nkwoma Inekwe & Yi Jin & Maria Rebecca Valenzuela, 2018. "Global financial network and liquidity risk," Australian Journal of Management, Australian School of Business, vol. 43(4), pages 593-613, November.
    15. Antinyan, Armenak & Horváth, Gergely & Jia, Mofei, 2019. "Social status competition and the impact of income inequality in evolving social networks: An agent-based model," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 79(C), pages 53-69.
    16. Ushchev, Philip & Zenou, Yves, 2018. "Price competition in product variety networks," Games and Economic Behavior, Elsevier, vol. 110(C), pages 226-247.
    17. Elliott, M. & Georg, C-P. & Hazell, J., 2020. "Systemic Risk-Shifting in Financial Networks," Cambridge Working Papers in Economics 2068, Faculty of Economics, University of Cambridge.
    18. Matthew O. Jackson & Brian W. Rogers & Yves Zenou, 2017. "The Economic Consequences of Social-Network Structure," Journal of Economic Literature, American Economic Association, vol. 55(1), pages 49-95, March.
    19. Bhattacharya, Mita & Inekwe, John Nkwoma & Valenzuela, Maria Rebecca, 2020. "Credit risk and financial integration: An application of network analysis," International Review of Financial Analysis, Elsevier, vol. 72(C).

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