How does the interbank market affect the performance of banks?
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The interbank market significantly influences the performance of banks by serving as a crucial mechanism for liquidity management and risk transmission. Interbank credit lines help banks manage liquidity shocks efficiently while minimizing the costs associated with maintaining reserves. When a bank fails, the interbank network can propagate this failure, leading to systemic risks and potential contagion effects throughout the banking system. Central banks play a vital role in mitigating systemic repercussions by coordinating actions and implementing policies like the Too-big-to-fail-policy. Changes in central bank liquidity policies can also impact interbank market activity and pricing, influencing how banks distribute liquidity among themselves. Overall, the structure and dynamics of the interbank market play a critical role in determining the resilience and stability of banks within the financial system.
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| Papers (5) | Insight |
|---|---|
| The interbank market impacts banks' performance by transmitting shocks leading to insolvency and contagion, triggering cascades of defaults and losses within the financial network. | |
1 Citations | The interbank market influences banks' performance by increasing activity, lowering interest rates relative to the policy rate, and enhancing liquidity distribution among banks, as shown in the Norwegian study. |
28 Citations | Interbank contagion impacts bank performance by showing how network dynamics and illiquidity lead to losses and failures, as seen in the 2007-09 crisis and post-crisis resilience. |
| The interbank market affects bank performance by spreading failures; the initial failing bank's size matters, but the interbank network structure is crucial for contagion extent. | |
1K Citations | Interbank market allows banks to manage liquidity shocks efficiently but can lead to systemic risk due to coordination failures, impacting banking system stability and requiring Central Bank intervention. |
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