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Bank stability in the uncollateralised overnight interbank market: A topological analysis

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  • Bai, Ye
  • Weiss, Pia
  • Murinde, Victor
  • Green, Christopher J.

Abstract

We study the topology characteristics of the Kenyan overnight interbank market and their impacts on bank stability. Our intraday transaction dataset covers 2003 to 2012, including six major liquidity shocks. We uncover new results that the Kenyan interbank network is an incomplete network with higher interconnectedness and exposure during liquidity shocks, such that the shocks tend to spread quickly throughout the network. The main implication of our finding is that in such tiered networks, core banks could pose risks to the whole system. Consistently, our further empirical results suggest that the high interbank network interconnectedness can smoothen liquidity flow during quiet times, but may lead to over-exposure to borrowing banks directly or indirectly, especially during disturbances.

Suggested Citation

  • Bai, Ye & Weiss, Pia & Murinde, Victor & Green, Christopher J., 2023. "Bank stability in the uncollateralised overnight interbank market: A topological analysis," International Review of Economics & Finance, Elsevier, vol. 88(C), pages 1223-1246.
    • Handle: RePEc:eee:reveco:v:88:y:2023:i:c:p:1223-1246
    DOI: 10.1016/j.iref.2023.07.063
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    References listed on IDEAS

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    1. Freixas, Xavier & Parigi, Bruno M & Rochet, Jean-Charles, 2000. "Systemic Risk, Interbank Relations, and Liquidity Provision by the Central Bank," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 611-638, August.
    2. Chen, Bing & Li, Li & Peng, Fei & Anwar, Sajid, 2020. "Risk contagion in the banking network: New evidence from China," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    3. Rochet, Jean-Charles & Tirole, Jean, 1996. "Interbank Lending and Systemic Risk," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 733-762, November.
    4. Flannery, Mark J, 1996. "Financial Crises, Payment System Problems, and Discount Window Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 804-824, November.
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    More about this item

    Keywords

    Interbank market; Network topology; Liquidity shocks; Bank stability; Kenya;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • N27 - Economic History - - Financial Markets and Institutions - - - Africa; Oceania

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