The Microstructure of the Money Market Before and after the Financial Crisis: A Network Perspective

Abstract

This paper provides a detailed microstructure analysis of the euro money market by taking a network perspective. Banks are the nodes of the networks; overnight unsecured loans form the links connecting the nodes. The static analysis of network indicators confirms a number of stylised facts verified for other real complex systems: interbank networks are highly sparse, far from being complete, exhibit the small world property and a power-law distribution of degree (the number of counterparties each bank establishes links with). On the other hand the tendency of banks to cluster, i.e. to form groups where links are relatively denser, is much lower than in other real systems. The analysis of the topology before versus after the start of the crisis provides interesting insights into the potential for financial contagion; the partition of the network into several smaller sub-networks documents a move against market integration; heterogeneous patterns of indicators across banks of different size offer insights into banks' behaviour. Finally, the analysis of network centrality indicates unambiguously that the biggest banks are also the most central/influent in the system before the onset of the crisis. Things change after August 2007 since medium-sized and very small banks progressively increase their influence in the market as liquidity providers.

The network structure of the CDS market and its determinants

“…In aggregate, active traders sell and less active traders buy (net) CDS protection, which parallels the finding that smaller banks tend to lend to bigger, 'moneycenter' banks (for a recent study see Gabrieli, 2011). The aggregate CDS network also exhibits the so-called "small world" properties that have been documented for other financial networks, as well as a scale-free degree distribution.…”

Assessing interbank contagion using simulated networks

“…by means of entropy measure) accounts for a very dynamic, unstable nature of the interbank structures confirmed by many studies (see e.g. Garratt et al (2011);Gabrieli (2011)). The way in which linkages are drawn may still be an issue for the distribution of the whole network.…”

“…11 This produces a very dynamic pattern of interbank networks, which reflects well the volatile nature of financial network structures (see e.g. Garratt et al (2011) andGabrieli (2011)). It also aims to circumvent the averaging bias characteristic of entropy measures, which tend to produce too much averaging at the tails and thus may underestimate contagion risk (see e.g.…”

“…13 Gabrieli (2011) as an exception also provides a network analysis covering at least part of the euro area money market. Likewise, Garratt et al (2011) presents a global interbank network in their paper.…”

Bank characteristics and the interbank money market: a distributional approach

“…In particular, a number of studies have investigated how movements in borrowing costs depend on bank specific characteristics such as their size and creditworthiness, see Angelini, Nobili and Picillo (2011) and Gabrieli (2011a), on banks ability to exploit changing market microstructure conditions, see Gabbi et al (2014), or they have concentrated on the intraday behaviour of the rates to gain further insights into the behaviour of banks and into the provision of liquidity in the overnight money market, see Baglioni and Monticini (2008), Baglioni and Monticini (2010), Angelini (2000), Beaupain Gabrieli (2011b) and Finger et al (2012). Interestingly, most of these studies consider data up to the collapse of Lehman Brothers.…”