The Role of Information and Liquidity in Interbank Network Formation

  • Di Xiao

Student thesis: Doctoral ThesisPhD

Abstract

Interbank markets are critical to banking systems, as they enable banks to manage liquidity and allow monetary policy to go through. As the 2007 global financial crisis shows, an unexpected "freeze up" of interbank markets can cause difficulties for central bank interventions and the overall economy, which demonstrates the need to better understand systemic risk. To this aim, a comprehensive picture of interbank markets and their lending networks is necessary and of much importance. The objective of this study is to deepen our understanding of interbank network formation, which has received relatively less attention. We hope to better perceive how factors like asymmetric information and liquidity preference influence the interbank structure, and to further explore impacts from monetary policy. In the first essay of this study, we develop a model of the formation of interbank lending network, with risk aversive banks maximising expected profits in the case of information asymmetry. The equilibrium interbank structures are investigated to understand how a "freeze" market is likely to occur in a stress situation. In the second paper of this study, we introduce another interbank network formation model where a large number of homogenous banks having preferences to both profits and cash. Interest rates are determined endogenously through an internal trade off between these preferences. Realistic network structures are found in the interbank market of computer experiments. The third essay further considers the impact of monetary policy on the interbank market proposed in essay 2. The key features of the interbank market structure remain roughly unchanged after central bank operation. However, banks of different network positions are not symmetrically impacted.
Date of Award19 Feb 2018
LanguageEnglish
Awarding Institution
  • University of Bath
SupervisorAndreas Krause (Supervisor) & Javier Rivas Ruiz (Supervisor)

Keywords

  • Interbank lending
  • Interbank network
  • core-periphery structure

Cite this

The Role of Information and Liquidity in Interbank Network Formation
Xiao, D. (Author). 19 Feb 2018

Student thesis: Doctoral ThesisPhD