Interconnectedness in the Interbank Market

RePEc Short ID: pbr67
ORCID iD: 0000-0001-8184-2610

Brunetti, Celso; Harris, Jeffrey H.; Mankad, Shawn; Michailidis, George

doi:10.17016/FEDS.2015.090

Working Paper

Interconnectedness in the Interbank Market

Abstract: We study the behavior of the interbank market before, during and after the 2008 financial crisis. Leveraging recent advances in network analysis, we study two network structures, a correlation network based on publicly traded bank returns, and a physical network based on interbank lending transactions. While the two networks behave similarly pre-crisis, during the crisis the correlation network shows an increase in interconnectedness while the physical network highlights a marked decrease in interconnectedness. Moreover, these networks respond differently to monetary and macroeconomic shocks. Physical networks forecast liquidity problems while correlation networks forecast financial crises.

Keywords: Interconnectedness; correlation network; financial crisis; interbank markets; physical network;

https://doi.org/10.17016/FEDS.2015.090