Interbank lending market

About: Interbank lending market is a research topic. Over the lifetime, 2269 publications have been published within this topic receiving 56819 citations.

Can Relationship Banking Survive Competition

Abstract: How will banks evolve as competition increases from other banks and from the capital market? Will banks become more like capital market underwriters and offer passive transaction loans or return to their roots as relationship lending experts? These are the questions we address. Our key result is that as interbank competition increases, banks make more relationship loans, but each has lower added value for borrowers. Capital market competition reduces relationship lending ~and bank lending shrinks!, but each relationship loan has greater added value for borrowers. In both cases, welfare increases for some borrowers but not necessarily for all. RAPID CHANGES IN F INANCIAL SERVICES ARE threatening commercial banks. In the United States, mutual funds such as Fidelity and Merrill Lynch compete for banks’ core deposits. Investment banks, armed with a variety of financial market innovations, challenge banks’ traditional lending products. Banks also find themselves in greater competition with one another as globalization and deregulation weaken geographic boundaries and encourage crossborder ~Europe! and interstate ~U.S.! banking. These developments raise numerous fundamental questions. Will the relationship-oriented European bank system survive competitive pressures in this changing environment? Will U.S. banks focus more on “relationship banking” 1 —whereby banks invest in building relationships with borrowers—or on “transaction banking,” which involves “arm’s length” transactions rather

Systemic risk, interbank relations and liquidity provision by the Central Bank

Abstract: We model systemic risk in an interbank market. Banks face liquidity needs as consumers are uncertain about where they need to consume. Interbank credit lines allow to cope with these liquidity shocks while reducing the cost of maintaining reserves. However, the interbank market exposes the system to a coordination failure (gridlock equilibrium) even if all banks are solvent. When one bank is insolvent, the stability of the banking system is affected in various ways depending on the patterns of payments across locations. We investigate the ability of the banking system to withstand the insolvency of one bank and whether the closure of one bank generates a chain reaction on the rest of the system. We analyze the coordinating role of the Central Bank in preventing payments systemic repercussions and we examine the justification of the Too-big-to-fail-policy.

Interbank lending and systemic risk

Abstract: Systemic risk refers to the propagation of a bank's economic distress to other economic agents linked to that bank through financial transactions. Banking authorities often prevent systemic risk through an implicit insurance of interbank claims, or by reducing interbank transactions and centralizing banks' liquidity management. This paper investigates whether the flexability afforded by decentralized bank interactions can be preserved while protecting the central banks from the necessity of conducting undesired rescue operations. It develops a model in which decentralized interbank leading is motivated by peer monitoring. In this context, the paper derives the optimal prudential rules, and, in particular, looks at the impact of interbank monitoring on the solvency and liquidity ratios of borrowing and lending banks. Last, it provides conditions which a Too Big To Fail policy is or is not justified and studies the possibility of propagation of a bank's liquidity shock throughout the financial system. Copyright 1996 by Ohio State University Press.

Network topology of the interbank market

Abstract: We provide an empirical analysis of the network structure of the Austrian interbank market based on Austrian Central Bank (OeNB) data. The interbank market is interpreted as a network where banks are nodes and the claims and liabilities between banks define the links. This allows us to apply methods from general network theory. We find that the degree distributions of the interbank network follow power laws. Given this result we discuss how the network structure affects the stability of the banking system with respect to the elimination of a node in the network, i.e. the default of a single bank. Further, the interbank liability network shows a community structure that exactly mirrors the regional and sectoral organization of the current Austrian banking system. The banking network has the typical structural features found in numerous other complex real-world networks: a low clustering coefficient and a short average path length. These empirical findings are in marked contrast to the network structures th...