PrefBlog

BIS has released a working paper by Ben Craig and Goetz von Peter titled Interbank tiering and money center banks:

This paper provides evidence that interbank markets are tiered rather than flat, in the sense that most banks do not lend to each other directly but through money center banks acting as intermediaries. We capture the concept of tiering by developing a core-periphery model, and devise a procedure for fitting the model to real-world networks. Using Bundesbank data on bilateral interbank exposures among 1800 banks, we find strong evidence of tiering in the German banking system. Econometrically, bank-specific features, such as balance sheet size, predict how banks position themselves in the interbank market. This link provides a promising avenue for understanding the formation of financial networks.
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The first column of Table 1 reports the simplest regression using bank size as the sole explanatory variable. The log of total bank assets is highly significant; a marginal increase in size from the average balance sheet of &eur;230 million raises the probability of belonging to the core by a sixth of a percent. Indeed, size is a fairly reliable classifier. The average size of banks in the core is 51 times that of banks in the periphery. Hence, large banks tend to be in the core, while small banks are found in the periphery of the interbank network.
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Systemic importance is highly correlated with a bank’s network position: it is extremely unlikely that a systemically important bank would not be in the core, as indicated by the low rate of false core predictions, Prob(c|P). But the moderate fit also suggests that a bank’s position in the network is something that goes beyond its systemic importance.

The success of “Balance Sheet Size” in predicting network placement supports my contention that surcharges for systemically important banks should be based on a balance sheet variable – either gross assets or risk-weighted assets, I’m not particular – rather than upon a regulator’s determination that such-and-such bank is systemically important.

One thing I would like to see addressed is an examination of how increasing the risk-weighting of interbank assets would change the model. It is far too cheap, in terms of capital, for a bank to hold another bank’s paper; this increases the chance for contagion.

It was a day of readjusting prices on continued heavy volume today, with PerpetualDiscounts losing 8bp and FixedResets picking up 8bp.

This entry was posted on Thursday, October 7th, 2010 at 10:57 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.