Market Frictions, Interbank Linkages and Excessive Interconnections

Author/Editor:

Pragyan Deb

Publication Date:

August 26, 2016

Electronic Access:

Download PDF. Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper studies banks' decision to form financial interconnections using a model of financial contagion that explicitly takes into account the crisis state of the world. This allows us to model the network formation decision as optimising behaviour of competitive banks, where they balance the benefits of forming interbank linkages against the cost of contagion. We use this framework to study various market frictions that can result in excessive interconnectedness that was seen during the crisis. In this paper, we focus on two channels that arise from regulatory intervention—deposit insurance and the too big to fail problem.

Series:

Working Paper No. 16/180

Subject:

English

Publication Date:

August 26, 2016

ISBN/ISSN:

9781475530292/1018-5941

Stock No:

WPIEA2016180

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

41

Please address any questions about this title to publications@imf.org