{
  "title": "Market Frictions, Interbank Linkages and Excessive Interconnections",
  "publication": "IMF Working Papers, August 26, 2016",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/market-frictions-interbank-linkages-and-excessive-interconnections-44203",
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  "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.",
  "sections": [
    {
      "heading": "Summary and research question",
      "content": "- 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.\n- The network formation decision is modeled as optimising behaviour of competitive banks that balance the benefits of forming interbank linkages against the cost of contagion.\n- The framework is used to study various market frictions that can result in excessive interconnectedness observed during the crisis.\n- The paper focuses on two channels that arise from regulatory intervention—deposit insurance and the too big to fail problem."
    },
    {
      "heading": "Methodology and model features",
      "content": "- Uses a model of financial contagion that explicitly takes into account the crisis state of the world.\n- Models network formation as the optimizing decision of competitive banks.\n- Balances benefits of interbank linkages against contagion costs.\n- Analyzes effects of market frictions that stem from regulatory intervention."
    },
    {
      "heading": "Main findings and insights",
      "content": "- Market frictions linked to regulatory intervention can lead to excessive interconnectedness among banks.\n- Two highlighted channels that contribute to excessive interconnections:\n  - Deposit insurance.\n  - The too big to fail problem."
    },
    {
      "heading": "Policy implications and considerations",
      "content": "- Regulatory design relating to deposit insurance and handling of systemically important institutions can influence banks' incentives to form interbank linkages.\n- Addressing market frictions implied by deposit insurance and too-big-to-fail policies is important to mitigate excessive interconnectedness and reduce systemic contagion risk."
    },
    {
      "heading": "Subjects and keywords",
      "content": "- Subjects: Asset and liability management; Banking; Deposit insurance; Financial contagion; Financial crises; Financial institutions; Financial markets; Financial sector policy and analysis; Interbank markets; Liquidity; Systemically important financial institutions\n- Keywords: bank depositor; bank portfolio; bank run; Contagion; deposit insurance; depositor payoff; depositor type; Financial contagion; financial crises; financial crisis; Global; impatient depositor; interbank deposit; Interbank markets; liquid asset; Liquidity; network formation; patient depositor; Systemically important financial institutions; too-big-to-fail; WP\n\nIMF Working Paper by Pragyan Deb, \"Market Frictions, Interbank Linkages and Excessive Interconnections\", Working Paper No. 2016/180 (August 26, 2016).\n\n---\n\n Content in this bundle\n\n- Market Frictions, Interbank Linkages and Excessive Interconnections\n  - Market Frictions, Interbank Linkages and Excessive Interconnections (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Market Frictions, Interbank Linkages and Excessive Interconnections (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/market-frictions-interbank-linkages-and-excessive-interconnections-44203"
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    "Authors: Pragyan Deb",
    "Published: August 26, 2016",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781475530292.001",
    "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.",
    "The network formation decision is modeled as optimising behaviour of competitive banks that balance the benefits of forming interbank linkages against the cost of contagion.",
    "The framework is used to study various market frictions that can result in excessive interconnectedness observed during the crisis.",
    "The paper focuses on two channels that arise from regulatory intervention—deposit insurance and the too big to fail problem.",
    "Uses a model of financial contagion that explicitly takes into account the crisis state of the world.",
    "Models network formation as the optimizing decision of competitive banks.",
    "Balances benefits of interbank linkages against contagion costs.",
    "Analyzes effects of market frictions that stem from regulatory intervention.",
    "Market frictions linked to regulatory intervention can lead to excessive interconnectedness among banks.",
    "Two highlighted channels that contribute to excessive interconnections:",
    "Regulatory design relating to deposit insurance and handling of systemically important institutions can influence banks' incentives to form interbank linkages.",
    "Addressing market frictions implied by deposit insurance and too-big-to-fail policies is important to mitigate excessive interconnectedness and reduce systemic contagion risk.",
    "Subjects: Asset and liability management; Banking; Deposit insurance; Financial contagion; Financial crises; Financial institutions; Financial markets; Financial sector policy and analysis; Interbank markets; Liquidity; Systemically important financial institutions",
    "Keywords: bank depositor; bank portfolio; bank run; Contagion; deposit insurance; depositor payoff; depositor type; Financial contagion; financial crises; financial crisis; Global; impatient depositor; interbank deposit; Interbank markets; liquid asset; Liquidity; network formation; patient depositor; Systemically important financial institutions; too-big-to-fail; WP",
    "**Market Frictions, Interbank Linkages and Excessive Interconnections**"
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