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A minimal model of money creation within secured interbank markets

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  • Victor Le Coz

    (LadHyX - Laboratoire d'hydrodynamique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique, MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec - Université Paris-Saclay)

  • Michael Benzaquen

    (LadHyX - Laboratoire d'hydrodynamique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique, CFM - Capital Fund Management)

  • Damien Challet

    (MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec - Université Paris-Saclay, FiQuant - Chaire de finance quantitative - MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec - Université Paris-Saclay)

Abstract

We propose a minimal model of the secured interbank network able to shed light on recent money markets puzzles. We find that excess liquidity emerges due to the interactions between the reserves and liquidity ratio constraints; the appearance of evergreen repurchase agreements and collateral re-use emerges as a simple answer to banks' counterparty risk and liquidity ratio regulation. In line with prevailing theories, re-use increases with collateral scarcity. In our agent-based model, banks create money endogenously to meet the funding requests of economic agents. The latter generate payment shocks to the banking system by reallocating their deposits. Banks absorbs these shocks thanks to repurchase agreements, while respecting reserves, liquidity, and leverage constraints. The resulting network is denser and more robust to stress scenarios than an unsecured one; in addition, the stable bank trading relationships network exhibits a core-periphery structure. Finally, we show how this model can be used as a tool for stress testing and monetary policy design.

Suggested Citation

  • Victor Le Coz & Michael Benzaquen & Damien Challet, 2025. "A minimal model of money creation within secured interbank markets," Post-Print hal-05273328, HAL.
    • Handle: RePEc:hal:journl:hal-05273328
    DOI: 10.1016/j.jebo.2025.107142
    Note: View the original document on HAL open archive server: https://hal.science/hal-05273328v1
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    References listed on IDEAS

    as
    1. Belinda Cheung & Mark Manning & Angus Moore, 2014. "The Effective Supply of Collateral in Australia," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 53-66, September.
    2. Matteo Accornero, 2020. "Repo Markets, Collateral Re-use and Systemic Fragility. A Literature Review," Working Papers 7/20, Sapienza University of Rome, DISS.
    3. Johannes Brumm & Michael Grill & Felix Kubler & Karl Schmedders, 2023. "Re-use of collateral: Leverage, volatility, and welfare," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 47, pages 19-46, January.
    4. Victor Le Coz & Nolwenn Allaire & Michael Benzaquen & Damien Challet, 2024. "Stylized facts in money markets: an empirical analysis of the eurozone data," Papers 2410.16021, arXiv.org.
    5. Samira BOURAHLA & Émilie FIALON & Alexandre GARCIA & Aurélien VIOLON, 2018. "Does the leverage ratio have an adverse impact on client clearing? [Les services de compensation centrale pour compte de tiers pénalisés par le ratio de levier ?]," Bulletin de la Banque de France, Banque de France, issue 218.
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    7. Baldo, Luca & Hallinger, Benoît & Helmus, Caspar & Herrala, Niko & Martins, Débora & Mohing, Felix & Petroulakis, Filippos & Resinek, Marc & Vergote, Olivier & Usciati, Benoît & Wang, Yizhou, 2017. "The distribution of excess liquidity in the euro area," Occasional Paper Series 200, European Central Bank.
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