Interbank Market as Network

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Interbank Marketas Network

• Alessandro Cappellini
• October 1st 2004
• cappellini_at_econ.unito.it

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• ...second only to its macro-stability
  responsibilities is the central banks
  responsibility to use its authority and expertise
  to forestall financial crises (including systemic
  disturbances in the banking system) and to manage
  such crises once they occur.
• (Alan Greenspan 1997)

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Agenda

• Interbank Market
• Interbank Market Italy
• Crisis contagion
• Crisis effects
• Networks
• Elsinger Lehar Summer
• Hanel Pichler Thurner
• Boss Elsinger Summer Thurner
• Müller
• Inaoka et al.

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Interbank market

• Interbank market allows banks with liquidity
  surpluses to provide liquidity for banks with
  liquidity shortages.
• Its main purpose is to redistribute funds
  efficiently among banks.
• Stats collected as Liability (or exposure) matrix
  by national central bank
• Real-time gross settlement (RTGS) system
  processes payments in real time on a transaction
  by transaction basis.
• Or Know as Automated Clearing Houses (BI-COMP
  BI-REL TARGET)

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Interbank Market Italy
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Crisis contagion

• The study of Interbank Market is directly related
  to financial crisis and market stability, to
  understand Systemic Risk through Correlated
  Exposures and to prevent Domino-effects
• Channels of financial contagion
• Contagion can be driven by information. A bank
  suffering a liquidity problem can induce
  creditors of other banks with a similar structure
  to suspect difficulties in their banks, too.
• Second, contagion can affect other financial
  institutions via direct linkages created by
  payment system.

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Crisis effects
Effects of financial contagion

• One bank may cause losses to a creditor bank
  (credit effect, exposure).

• Or compromise the liquidity of a potential
  debtor, i.e., of a bank which finds that a credit
  line it held with the troubled institution has
  dried up (liquidity effect).

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Networks

• Network with
• Banks as vertexes
• Transaction as edges
• Characteristics
• Directed
• Not fully connected (Each banks has liabilities
  with some (not all) other banks)
• Limits and Notes
• Only Monetary transaction (e.g. No corporate
  Bonds)
• No single branches
• No clients
• Only Bank from FMI universe
• Presence of head institution linked to many
  others

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Elsinger Lehar Summer

• Network
• Data from the monthly reports (MAUS), the
  Austrian Central Bank (OeNB) and the database of
  the OeNB major loans register (Großkreditevidenz,
  GKE).
• 881 independent banks for September 2002
• Historical simulation
• 12 years market scenario (interest rates and fx).
  Foreign exchange exposures for USD, JPY, GBP, and
  CHF only. Market data for scenarios from
  Datastream.
• Information on net positions in all currencies
  combined for different maturity buckets
• up to 3 months but not callable,
• 3 months to 1 year,
• 1 to 5 years, more than
• 5 years

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Hanel Pichler Thurner (1/2)

• Basle capital risk
• Test on two network types
• Regular One Dimension
• Fully Connected
• Prisoner dilemma iterated
• Low risk (and returns) with major risk
  diversification

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Hanel Pichler Thurner (2/2)

• Growing TIER capital, delaying default
• Highly dependency on network topology for
  contagions
• Increasing connection, delaying default

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Boss Elsinger Summer Thurner

• Austrian banking System
• Categories
• Saving Banks
• Raiffeisen (agricultural)
• Volksbanken
• Joint Stock Banks
• State Mortage Banks
• Housing Construction Savings and Loan
  Associations
• Special purpose Banks

Clustering Coefficient 0.12 (banks are
interested in limited diversification for the
cost of linking Average Shortest Path Length
2.26 (Very low degree of separation)
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Müller (1/3)

• The data are taken from the Swiss National Banks
  interbank statistics (quarterly)
• Categories
• Big banks
• Cantonal banks (universal banks, focus on the
  savings and mortgage business)
• Regional banks (savings and mortgage business)
• Raiffeisen banks
• Trading and stock exchange banks (universal
  banks)
• Private banks (specialize in asset management)

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Müller (2/3)
Swiss Bank Subnetwork
Two Big Banks with a central position UBS, CSFB
Higly centralized Regional banks
Homogeneous Cantonal Subnetwork
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Müller (3/3)

• Detect Relevant banks
• Number of interbank linkages (In- and outdegree
  centrality)
• Size of interbank position (valued degree
  centrality)
• Distance from all other Banks (In-closeness
  centrality)
• Importance of counterparties (Rank centrality)
• Position in the network (Betweenness centrality)

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Inaoka et al.

• Japan BOJ-Net data, from June 2001 to December
  2002
• 546 banks makes transactions in the period and
  create 7351 pairs
• 354 banks are used (gt 21 transaction)

• City Banks (Red dots) are in the more connected
  zone the center
• Attention on the green zone (bottom left). It is
  a subnetwork composed by Shinkin Banks, a
  cooperative of small local banks, that
  coordinated some critical rules (such as in
  federal model).

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• Systemic risk is the likelihood of a sudden,
  usually unexpected, collapse of confidence in a
  significant portion of the banking or financial
  system with potentially large real economic
  effects.
• (Bartholomew, Philip F. and Gary W. Whalen
  Fundamentals of Systemic Risk in Kaufman,
  George G. (1995) Banking, Financial Markets, and
  Systemic Risk, Research in Financial Services
  Private and Public Policy, Vol. 7, 3-17)

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Bibliography

• Rudolf Hanel, Stefan Pichler, Stefan Thurner.
  Banking Regulation and Network-topology
  Dependence of Iterative Risk-trading Games
• Stefan Thurner, Rudolf Hanel, and Stefan Pichler
  Risk trading, network topology, and banking
  regulation Sep 2003
• Helmut Elsinger, Alfred Lehar, Martin Summer,
  Risk Assessment for Banking Systems
• Michael Boss, Helmut Elsinger, Martin Summer, and
  Stefan Thurner The Network Topology of the
  Interbank Market
• Hajime Inaoka, Takuto Ninomiya, Ken Taniguchi,
  Tokiko Shimizu, Hideki Takayasu Fractal Network
  derived from banking transaction -- An analysis
  of network structures formed by financial
  institutions -- April 2004
• Jeannette Müller, Two Approaches to Assess
  Contagion in the Interbank Market December 23,
  2003
• Morten L. Bech, Kimmo Soramäki Systemic risk in a
  netting system revisited August 2004
• Greenspan, Alan, 1997, Supervision of Banking
  Organizations, Testimony of Alan Greenspan,
  Chairman of the Board of Governors of the Federal
  Reserve System, before the Subcommittee on
  Capital Markets, Securities and Government
  Sponsored Enterprises of the Committee on Banking
  and Financial Services, U.S. House of
  Representatives, March 19, 1997.