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Interconnectedness in the Interbank Market

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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.

Suggested Citation

  • Celso Brunetti & Jeffrey H. Harris & Shawn Mankad & George Michailidis, 2015. "Interconnectedness in the Interbank Market," Finance and Economics Discussion Series 2015-90, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2015-90
    DOI: 10.17016/FEDS.2015.090
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    More about this item

    Keywords

    Interconnectedness; correlation network; financial crisis; interbank markets; physical network;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G2 - Financial Economics - - Financial Institutions and Services
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General

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