This paper proposes a dynamic multi-agent model of a banking system with central bank. Banks optimize a portfolio of risky investments and riskless excess reserves according to their risk, return, and liquidity preferences. They are linked via interbank loans and face stochastic deposit supply. Comparing different interbank network structures, it is shown that money-center networks are more stable than random networks. Evidence is provided that the central bank stabilizes interbank markets in the short run only. Systemic risk via contagion is compared with common shocks and it is shown that both forms of systemic risk require different optimal policy responses.
All figures used in this report apply to Berkshire's A shares, the successor to the only stock that the company had outstanding before 1996. The B shares have an economic interest equal to 1/30th that of the A.
Reproduction permitted only if source is stated.ISBN 978-3-95729-108-0 (Printversion) Non-technical summary Research QuestionThe insolvency of the US investment bank Lehman Brothers on 15 September 2008 prompted widespread fears of an interbank market freeze in the euroarea. The eurosystem acted swiftly by adopting a set of "emergency measures", including a change of the monetary policy framework from a variable-rate auction-based tender system to a fixed-rate full-allotment regime. Since interbank markets are over-the-counter markets, studying them requires transaction-level payment system data which only recently became available. In this paper, we use a novel and unique dataset of all transactions settled between all European banks to answer a number of policy relevant questions about the developments in the interbank market around the Lehman insolvency. Was there actually a market freeze? If so, was it driven by concerns about counterparty risk? Did banks hoard liquidity as a consequence? How did the structure of the interbank market change as a result of the Lehman insolvency? Does the network structure matter for banks' access to liquidity? And did the "emergency measures" adopted by the Eurosystem stabilize the interbank market? ContributionIn this paper we provide an analysis of a large exogenous shock to the euroarea interbank market. We study how the reallocation of liquidity in the interbank market was affected by the shock on two different levels. On the aggregate level we are the first to complement existing empirical studies of the overnight interbank market by simultaneously studying the dynamics in the term segment. This allows us to identify the market mechanism that caused the turmoil in the euroarea interbank market. By taking a network view we add a completely novel structural dimension to the empirial literature on market freezes. ResultsFirst, we show that only the term segments of the interbank market exhibited a substantial drop in turnover, reminiscent of a market freeze. Banks engage in what can best be described as maturity shortening, which leads to an increase of lending in the overnight segment. Second, we put the structural change of the interbank network structure due to the Lehman insolvency and the Eurosystem's "emergency measures" in the context of the novel literature studying the effectiveness of financial networks. We show that the Lehman insolvency leads to a shrinking of the interbank network that was exacerbated by the "emergency measures" of the eurosystem that replaced a sizeable part of the interbank market with the central bank's balance sheet. The resulting network structure is likely to be less efficient than the network structure before the Lehman insolvency. Finally, we show that there is substantial heterogeneity in banks' access to liquidity, depending on the bank's position within the interbank network. AbstractWe study the liquidity allocation among European banks around the Lehman insolvency using a novel dataset of all interbank loans settled via the Euros...
We examine the effect of ex-post information contagion on the ex-ante level of systemic risk defined as the probability of joint bank default. Because of counterparty risk or common exposures, bad news about one bank reveals valuable information about another bank, triggering information contagion. When banks are subject to common exposures, information contagion induces small adjustments to bank portfolios and therefore increases overall systemic risk. When banks are subject to counterparty risk, by contrast, information contagion induces a large shift toward more prudential portfolios, thereby reducing systemic risk.
We study the liquidity allocation among European banks around the Lehman insolvency using a novel dataset of all interbank loans settled via the Eurosystem's payment system TARGET2. Following the Lehman insolvency, lenders in the overnight segment become sensitive to counterparty characteristics and banks start hoarding liquidity by shortening the maturity of their interbank lending. This aggregate change in liquidity reallocation is accompanied by a substantial structural change that can best be characterized as a shrinking of the interbank network. Such a change in the network structure is consequential: banks with higher centrality within the network have better access to liquidity and are able to charge larger intermediation spreads. Therefore, we show the existence of a sizeable interbank lending channel.
How species richness relates to environmental gradients at large extents is commonly investigated aggregating local site data to coarser grains. However, such relationships often change with the grain of analysis, potentially hiding the local signal. Here we show that a novel network technique, the “method of reflections”, could unveil the relationships between species richness and climate without such drawbacks. We introduced a new index related to potential species richness, which revealed large scale patterns by including at the local community level information about species distribution throughout the dataset (i.e., the network). The method effectively removed noise, identifying how far site richness was from potential. When applying it to study woody species richness patterns in Spain, we observed that annual precipitation and mean annual temperature explained large parts of the variance of the newly defined species richness, highlighting that, at the local scale, communities in drier and warmer areas were potentially the species richest. Our method went far beyond what geographical upscaling of the data could unfold, and the insights obtained strongly suggested that it is a powerful instrument to detect key factors underlying species richness patterns, and that it could have numerous applications in ecology and other fields.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.
hi@scite.ai
10624 S. Eastern Ave., Ste. A-614
Henderson, NV 89052, USA
Copyright © 2024 scite LLC. All rights reserved.
Made with 💙 for researchers
Part of the Research Solutions Family.