Interbank Market as Network

1. Interbank Marketas Network Alessandro Cappellini October 1st 2004 cappellini@econ.unito.it

2. “...second only to its macro-stability responsibilities is the central bank’s 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)

3. 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.

4. 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)

5. Interbank Market: Italy

6. 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.

7. Crisis: effects • 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). Effects of financial contagion • One bank may cause losses to a creditor bank (credit effect, exposure).

8. 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

9. 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

10. 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

11. Hanel Pichler Thurner (2/2) • Growing TIER capital, delaying default • Highly dependency on network topology for contagions • Increasing connection, delaying default

12. 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)

13. Müller (1/3) • The data are taken from the Swiss National Bank’s 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)

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

15. 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)

16. Inaoka et al. 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). • 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 (> 21 transaction)

17. “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)

18. 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.