Interbank money market concerns and actors’ strategies—A systematic review of 21st century literature

Abstract

As the reallocator of liquidity from banks with excess to banks with a deficit, the interbank money market (IMM) plays a fundamental role in the proper functioning of the banking system and the economy as a whole. The aggregate uncertainty derived from stochasticity of the overall level of the demand for short-term liquidity and the likelihood of domino failures of tightly connected competitors who lend themselves vast amounts of liquidity explains the complexity of decisions in this environment. To identify the most significant factors influencing actors' strategies, we first present the five underlying patterns discovered through a bibliometric analysis of 609 scientific documents in this field: contagion and systemic risk, stability, market structure, relationship and trust, and default and failure. Then, our detailed study findings on 160 recent works indicate elements that affect central banks' strategies in reducing systemic risk and preventing financial contagion, as well as managing the interbank network in a way that makes it more stable and resilient to shocks to conserve market confidence. Furthermore, they address factors that influence banks' strategies to maintain their lending relationships and mitigate default risk. In addition toThis is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited.

Exploring Credit Relationship Dynamics in an Interbank Market Benefiting from Blockchain-Based Distributed Trust: Insights from an Agent-Based Model

“…In addition to the agents' selfishness due to different ownerships, which sometimes makes them unreliable, one primary source of mistrust in such systems is their lack of global perspective and complete knowledge of the whole environment and their peers with hidden intentions [4]. An interbank market, as a highly stochastic economic environment [5], is a complex adaptive system [6,7] where banks lend large amounts of money to each other at interbank rates when they need liquidity in a short period [8], thus adapting to this stochastic environment. Establishing more lending relationships in this market helps borrowers with more diverse sources of liquidity [9] and enables them to borrow at lower interest rates from lenders with whom they have a relationship [10].…”

“…However, these relationships dynamically change due to the short-term nature of unsecured funding [11]. In order to preserve credit relationships, maintaining a level of trust is essential for all market participants, as its evaporation can lead to instability and liquidity crises [8].…”

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“…The role of the banking industry in the economy remains vital due to increasingly more stringent regulations (Storm, 2018;Sawyer, 2014). 1 The state uses banking mechanisms to achieve economic growth without significant inflationary costs (Alaeddini et al, 2023;Mishi, Tsegaye, 2017). While the financial sector has a high responsibility, it also faces higher risks than other industries (Domański, 2016).…”

Risk Management Strategies for the Banking Sector to Cope with the Emerging Challenges

“…The role of the banking industry in the economy remains vital due to increasingly more stringent regulations (Storm, 2018;Sawyer, 2014). 1 The state uses banking mechanisms to achieve economic growth without significant inflationary costs (Alaeddini et al, 2023;Mishi, Tsegaye, 2017). While the financial sector has a high responsibility, it also faces higher risks than other industries (Domański, 2016).…”