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Macroprudential Consolidation Policy in Interbank Networks

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  • Edoardo Gaffeo

    ()

  • Massimo Molinari

    ()

Abstract

Can consolidation policy be made consistent with macro-prudential supervision? In this study, we seek to provide new insights on this key-question using a network approach. We study how the resilience of a banking network evolves as we shock an initially homogenous competitive market with a sequence of M&A activities that significantly alter the topology of the network. We study how different M&A treatments impact on the structural vulnerabilities that can propagate through the system and we show that the severity of contagion and default dynamics depends on the chosen treatment. The desirability of alternative competitive settings (such as hub-centered market or a more concentrated and yet symmetric market) are assessed against an homogenous benchmark case and we show that the choice depends crucially on the size of the interbank market and the level of bank capitalization. The existence of a large highly connected hub is beneficial in a capitalized network with a well-developed interbank market but it can significantly weaken the system resilience in a poorly capitalized market. Antitrust and competition authorities shall adopt a state-contingent approach to M&A activities according to the market conditions in which banks operate.

Suggested Citation

  • Edoardo Gaffeo & Massimo Molinari, 2014. "Macroprudential Consolidation Policy in Interbank Networks," DEM Discussion Papers 2014/01, Department of Economics and Management.
  • Handle: RePEc:trn:utwpem:2014/01
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    References listed on IDEAS

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    Cited by:

    1. Zakaria Babutsidze & Maurizio Iacopetta, 2016. "Innovation, growth and financial markets," Journal of Evolutionary Economics, Springer, vol. 26(1), pages 1-24, March.
    2. Giorgio Fagiolo & Andrea Roventini, 2017. "Macroeconomic Policy in DSGE and Agent-Based Models Redux: New Developments and Challenges Ahead," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 20(1), pages 1-1.
    3. Edoardo Gaffeo & Massimo Molinari, 2016. "A functional perspective to financial networks," DEM Working Papers 2016/06, Department of Economics and Management.

    More about this item

    Keywords

    Consolidation Policy; Macroprudential Regulation; Interbank Networks;

    JEL classification:

    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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