Liquidity flows in interbank networks

Fabio Castiglionesi, Mario Eboli

Research output: Contribution to journalArticleScientificpeer-review

Abstract

This article characterizes the interbank deposit network as a flow network that is able to channel liquidity flows among banks. These flows are beneficial, allowing banks to cope with liquidity risk. First, we analyze the efficiency of three network structures: star-shaped, complete, and incomplete in transferring liquidity among banks. The star-shaped interbank network achieves the complete coverage of liquidity risk with the smallest amount of interbank deposits held by each bank. This result implies that the star-shaped network is most resilient to systemic risk. Second, we analyze the banks' decentralized interbank deposit decisions for a given network structure. We show that all network structures can generate an inefficiently low amount of interbank deposits. However, the star-shaped network induces banks to hold an amount of interbank deposits that is the closest to the efficient level. These results provide a rationale for consistent empirical evidence on sparse and centralized interbank networks.
Original languageEnglish
Pages (from-to)1291-1334
JournalReview of Finance
Volume22
Issue number4
DOIs
Publication statusPublished - Jul 2018

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Keywords

  • Interbank network, Liquidity coinsurance, Flow networks,

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