Contagion in the interbank market: Funding versus regulatory constraints

Georgescu, Oana-Maria

doi:10.1016/j.jfs.2015.02.003

Cited by 21 publications

(3 citation statements)

References 31 publications

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“…This makes miscoordination of depositors and creditors costly. Network studies have analyzed these problems, for example by studying bank runs (Dasgupta, 2004), short-term lending (Battiston et al, 2012a), maturity transformation (Georgescu, 2015) and rollover risk (Anand et al, 2012;Allen et al, 2012). Interbank network models also incorporate the balance sheet structures of banks at increasing levels of sophistication.…”

Section: Introductionmentioning

confidence: 99%

Too interconnected to fail: a survey of the interbank networks literature

Hüser¹

2015

JNTF

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A network approach to banking is particularly important for assessing financial stability and systemic risk. This approach can be instrumental in capturing the externalities that the risk associated with a single institution may create for the entire system. Indeed, from a financial stability perspective, banks should neither be too-big-to-fail nor too-interconnected-to-fail. A better understanding of network externalities may facilitate the adoption of a macroprudential framework for financial supervision. Network externalities arise when risk-taking behavior of individual institutions affects other institutions and the system as a whole. To guide policy it becomes necessary, in this context, to measure the systemic importance of individual banks, i.e. their capacity to generate contagion in the rest of the system. The analysis of interbank networks can provide this guidance.Against this background we review the literature on interbank networks, which is part of a growing literature on financial networks. The broader financial networks literature is analyzing connections between financial institutions: banks, but also hedge funds, insurance companies, etc. We restrict the survey's focus on the interbank network literature. This survey presents a systematic overview of our current understanding of the structure of interbank networks, of how network characteristics affect contagion in the banking system and of how banks form connections when faced with the possibility of contagion and systemic risk. In particular, we highlight how the theoretical literature on interbank networks offers a coherent way of studying interconnections, contagion processes and systemic risk, while emphasizing at the same time the many challenges that must be addressed before general results on the link between the structure of the interbank network and financial stability can be established.The theoretical literature has generated a number of insights on the effect of the network structure on contagion. A first result is that the number and magnitude of defaults depend on the network topology. There is now substantial research characterizing those structures that tend to propagate default or alternatively that tend to dampen it. An avenue for further research is to have more realistic network structures on which to analyze contagion. Since empirical studies now provide an increasing number of stylized facts on the interbank network topology, research needs to move beyond deriving results on random networks or on overly simplified structures. Furthermore, the fragility of the system depends on the location in the network of the institution that was initially affected. Intuitively, the failure of core banks is more damaging than the failure of a periphery bank. Finally, another main finding is that there is a trade-off between risk sharing via linkages to other banks and contagion risk due to too many linkages. While the existence of the trade-off is not disputed, there is no consensus on whether a complete network dampens or fuels contag...

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Section: Introductionmentioning

confidence: 99%

Too interconnected to fail: a survey of the interbank networks literature

Hüser¹

2015

JNTF

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“…Previous evidence is also supported by Shin (2009), Huang & Ratnovski (2011) and Georgescu (2015, who argue that this funding strategy may lead to sudden withdraws from the banking system as a result of noisy negative news in the market. In particular, Shin (2009) points out that illiquidity shocks during the global financial crisis led to the silent run of wholesale funds from UK banks, and later, the disappearance of some of them.…”

Section: Literaturementioning

confidence: 82%

Credit funding and banking fragility : an empirical analysis for emerging economies

Guarín-López¹,

Lozano-Espitia²,

Lozano-Espitia³

et al. 2016

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This paper proposes an empirical model to identify and forecast banking fragility episodes using information on the credit funding sources. We predict the probability of occurrence of such episodes 0, 3 and 6 months ahead employing a Bayesian Model Averaging of logistic regressions. The exercises use monthly balance sheet data since the middle of the nineties for the banking system of nine emerging economies: Brazil, Colombia, Croatia, Czech Republic, Mexico, Peru, Poland, Taiwan and Turkey. Our findings suggest that the increasing use of wholesale funds to support credit expansion provides warning signals of banking frailness. The in-sample and out-of-sample predictions indicate that the proposed technique is a suitable tool for forecasting short-term financial fragility events. Therefore, monitoring these funds through our tool could become useful in prudential practice.

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“…Fire‐sale losses reduce the recovery value of loans granted to defaulted banks, thereby increasing their creditors’ losses (Caccioli et al., 2015; Cimini & Serri, 2016; Siebenbrunner, 2020; Siebenbrunner et al., 2017). Furthermore, in a banking system that uses a “mark‐to‐market” regime for the accounting of common assets, it is necessary to recognize the liquidation losses from depressed assets by all banks, even those that have not been exposed to the interbank network (Georgescu, 2015; Siebenbrunner, 2020; Siebenbrunner et al., 2017). This effect is also considered as another contagion channel.…”

Section: Results Of Integrative Review: the Affecting Factorsmentioning

confidence: 99%

Interbank money market concerns and actors’ strategies—A systematic review of 21st century literature

Alaeddini

Madiès

Reaidy

et al. 2022

Journal of Economic Surveys

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As the reallocator of liquidity from banks with excess to banks with a deficit, the interbank money market (IMM) plays a fundamental role in the proper functioning of the banking system and the economy as a whole. The aggregate uncertainty derived from stochasticity of the overall level of the demand for short-term liquidity and the likelihood of domino failures of tightly connected competitors who lend themselves vast amounts of liquidity explains the complexity of decisions in this environment. To identify the most significant factors influencing actors' strategies, we first present the five underlying patterns discovered through a bibliometric analysis of 609 scientific documents in this field: contagion and systemic risk, stability, market structure, relationship and trust, and default and failure. Then, our detailed study findings on 160 recent works indicate elements that affect central banks' strategies in reducing systemic risk and preventing financial contagion, as well as managing the interbank network in a way that makes it more stable and resilient to shocks to conserve market confidence. Furthermore, they address factors that influence banks' strategies to maintain their lending relationships and mitigate default risk. In addition toThis is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited.

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Contagion in the interbank market: Funding versus regulatory constraints

Cited by 21 publications

References 31 publications

Too interconnected to fail: a survey of the interbank networks literature

Too interconnected to fail: a survey of the interbank networks literature

Credit funding and banking fragility : an empirical analysis for emerging economies

Interbank money market concerns and actors’ strategies—A systematic review of 21st century literature

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