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The structure and resilience of the European interbank market

Author

Listed:
  • Ivan Alves
  • Stijn Ferrari
  • Pietro Franchini
  • Jean-Cyprien Heam
  • Pavol Jurca
  • Sam Langfield
  • Sebastiano Laviola
  • Franka Liedorp
  • Antonio Sánchez
  • Santiago Tavolaro
  • Guillaume Vuillemey

Abstract

Financial institutions are connected to each other by a series of bilateral transactions. In normal times, institutions’ connections may result in efficient risk transfer. But in crises, connections can facilitate contagion – as initial problems lead to chains of defaults and liquidity shortages – sparked by shocks which might arise within the financial system or from the real economy. Institutions are also interconnected in indirect ways, since they are exposed to common risk factors that can result in concurrent losses. For example, most banks extend loans secured by real estate: they are thus collectively exposed to falls in house prices. Resulting bank distress can then exacerbate initial problems: banks might simultaneously sell collateral (houses), thus worsening downward price spirals. Less tangibly, institutions can also be connected through perceptions of counterparties’ creditworthiness. Given uncertainty, financial institutions may in general become reluctant to lend to each other and hoard liquidity. Potential for contagion due to interconnectedness is a key component of systemic risk. As a first step towards understanding the mechanisms of contagion, this paper abstracts from complex indirect connections between banks, and rather focuses on direct linkages between 53 large EU banks, based on unique data on interbank exposures collected by national regulators as of the end of 2011. JEL Classification: G01, E58, G21

Suggested Citation

  • Ivan Alves & Stijn Ferrari & Pietro Franchini & Jean-Cyprien Heam & Pavol Jurca & Sam Langfield & Sebastiano Laviola & Franka Liedorp & Antonio Sánchez & Santiago Tavolaro & Guillaume Vuillemey, 2013. "The structure and resilience of the European interbank market," ESRB Occasional Paper Series 03, European Systemic Risk Board.
  • Handle: RePEc:srk:srkops:201303
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Jean-Cyprien Héam, 2014. "How to Measure Interconnectedness," EIOPA Financial Stability Report - Thematic Articles 3, EIOPA, Risks and Financial Stability Department.
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    4. G. Hauton & J.-C. Héam, 2014. "How to Measure Interconnectedness between Banks, Insurers and Financial Conglomerates?," Débats économiques et financiers 15, Banque de France.
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    More about this item

    Keywords

    interbank market; resilience; structure; contagion;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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