Journal of Evolutionary Economics

, Volume 26, Issue 1, pp 77–99

Macroprudential consolidation policy in interbank networks

Regular Article

DOI: 10.1007/s00191-015-0419-3

Cite this article as:
Gaffeo, E. & Molinari, M. J Evol Econ (2016) 26: 77. doi:10.1007/s00191-015-0419-3

Abstract

Can consolidation policy be made consistent with macro-prudential supervision? In this study, we seek to provide new insights on this key-question using a network approach. We study how the resilience of a banking network evolves as we shock an initially homogenous competitive market with a sequence of M&A activities that significantly alter the topology of the network. We study how different M&A treatments impact the structural vulnerabilities that can propagate through the system and we show that the severity of contagion and default dynamics depends on the chosen treatment. The desirability of alternative competitive settings (such as a hub-centered market or a more concentrated and yet symmetric market) are assessed against a homogenous benchmark case. We show that the choice depends crucially on the size of the interbank market and the level of bank capitalization. The existence of a large highly connected hub is beneficial in a capitalized network with a well-developed interbank market, but it can significantly weaken the system’s resilience in a poorly capitalized market. Antitrust and competition authorities should adopt a state-contingent approach to M&A activities according to the market conditions in which banks operate.

Keywords

Consolidation policy Macroprudential regulation Interbank networks 

JEL Classification

D85 G21 G34 L40 

Copyright information

© Springer-Verlag Berlin Heidelberg 2015

Authors and Affiliations

  1. 1.Department of Economics and ManagementUniversity of TrentoTrentoItaly
  2. 2.Department of Economics and LawSapienza University of Rome, Via del Castro Laurenziano 9RomeItaly

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