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Interbank rules during economic declines: Can banks safeguard capital base?

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Abstract

This paper studies the role of interbank credit within an agent-based model of the financial sector. Our main contribution consists in a behavioral foundation of banks demand and supply in the interbank market. We connect 100 heterogeneous banks that adapt their liquidity positions in the presence of shocks from the real economy via interbank deposits and interbank loans by using a common set of interbank rules. The key element in the model is the introduction of a Fermi–Dirac \(\kappa \) as a proxy of banks’ consistency in their behavior in the interbank market. For different growth–volatility scenarios we analyze, how the consistency interplays with the value of capital-base in the banking system. Overall, this paper provides simulation-based arguments that the interbank credit can safeguard capital-base during economic declines and that the interbank credit might be an important stabilizing factor for the real-world banking systems.

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Data sources: Federal Reserve Board (2018)

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Data sources: European Central Bank (2018)

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Notes

  1. See Upper (2011) and Hüser (2015) for literature overviews.

  2. An example of an interaction-based network approach to portfolio selection may be found in Steinbacher (2016) and the references provided therein.

  3. Iori et al. (2008), Fricke and Lux (2014), Boss et al. (2004a), Degryse and Nguyen (2007), Upper and Worms (2004), Bargigli et al. (2014), Alessandri et al. (2009), Fagiolo (2007), Barrat et al. (2004).

  4. See Step 2, Sect. 3.2 for more details about the algorithm we used to generate interbank deposits and loans.

  5. The simulator was implemented in the Microsoft Visual Studio 2010, Express Edition using Boost libraries for networks.

  6. Random network and small-world network are both connected networks. It follows that a union of their edge-sets is also a connected network.

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Acknowledgements

The authors would like to thank Patricia Walsh for her careful language correction; seminar participants at the German Network for New Economic Dynamics (GENED) Workshop and the School on Networks in Finance and Macroeconomics, Kiel Institute for the World Economy, Kiel, Germany, April 28–29, 2014, for helpful comments and suggestions in an early stage of the development of the interbank simulator; and two anonymous referees for their thoughtful review and numerous helpful comments and suggestions. All errors remain the responsibility of the authors.

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  1. Faculty of Business Studies, Katoliški inštitut, Ciril-Metodov trg 9, 1000, Ljubljana, Slovenia

    Mitja Steinbacher

  2. Faculty of Economics and Business, Maribor University, Razlagova 14, 2000, Maribor, Slovenia

    Timotej Jagrič

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Correspondence to Mitja Steinbacher.

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Steinbacher, M., Jagrič, T. Interbank rules during economic declines: Can banks safeguard capital base?. J Econ Interact Coord 15, 471–499 (2020). https://doi.org/10.1007/s11403-018-0228-5

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