Interbank Networks in the Shadows of the Federal Reserve Act / Haelim Anderson, Selman Erol, Guillermo Ordoñez.

Format:

Book

Author/Creator:

Anderson, Haelim.

Contributor:

National Bureau of Economic Research.

Erol, Selman.

Ordoñez, Guillermo.

Series:

Working Paper Series (National Bureau of Economic Research) no. w27721.

NBER working paper series no. w27721

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2020.

Summary:

Central banks provide public liquidity to traditional (regulated) banks with the intention of stabilizing the financial system. Shadow banks are not regulated, yet they indirectly access such liquidity through the interbank system. We build a model that shows how public liquidity provision may change the linkages between traditional and shadow banks, increasing systemic risk through three channels: reducing aggregate liquidity, expanding fragile short-term borrowing, and crowding out of private cross-bank insurance. We show that the creation of the Federal Reserve System and the provision of public liquidity changed the structure and nature of the U.S. interbank network in ways that are consistent with the model and its implications. We provide empirical evidence by constructing unique data on balance sheets and detailed disaggregated information on payments and funding connections in Virginia.

Notes:

Print version record

August 2020.