Market Frictions, Interbank Linkages and Excessive Interconnections

August 26, 2016

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Format: Chicago

Pragyan Deb. Market Frictions, Interbank Linkages and Excessive Interconnections, (USA: International Monetary Fund, 2016) accessed December 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper studies banks' decision to form financial interconnections using a model of financial contagion that explicitly takes into account the crisis state of the world. This allows us to model the network formation decision as optimising behaviour of competitive banks, where they balance the benefits of forming interbank linkages against the cost of contagion. We use this framework to study various market frictions that can result in excessive interconnectedness that was seen during the crisis. In this paper, we focus on two channels that arise from regulatory intervention—deposit insurance and the too big to fail problem.

Subject: Asset and liability management, Banking, Deposit insurance, Financial contagion, Financial crises, Financial institutions, Financial markets, Financial sector policy and analysis, Interbank markets, Liquidity, Systemically important financial institutions

Keywords: Bank depositor, Bank portfolio, Bank run, Contagion, Deposit insurance, Depositor payoff, Depositor type, Financial contagion, Financial crises, Financial crisis, Global, Impatient depositor, Interbank deposit, Interbank markets, Liquid asset, Liquidity, Network formation, Patient depositor, Systemically important financial institutions, Too-big-to-fail, WP

Publication Details

Pages:

41
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/180
Stock No:

WPIEA2016180
ISBN:

9781475530292
ISSN:

1018-5941

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