Interbank credit and the money manufacturing process: a systemic perspective on financial stability
Biondi, Yuri; Zhou, Feng (2019), Interbank credit and the money manufacturing process: a systemic perspective on financial stability, Journal of Economic Interaction and Coordination, 14, 3, p. 437-468. 10.1007/s11403-018-0230-y
TypeArticle accepté pour publication ou publié
External document linkhttp://dx.doi.org/10.2139/ssrn.2924402
Journal nameJournal of Economic Interaction and Coordination
MetadataShow full item record
Abstract (EN)Interbank lending and borrowing occur when financial institutions seek to settle and refinance their mutual positions over time and circumstances. This interactive process involves money creation at the aggregate level. Coordination mismatch on interbank credit may trigger systemic crises. This happened when, since summer 2007, interbank credit coordination did not longer work smoothly across financial institutions, eventually requiring exceptional monetary policies by central banks, and guarantee and bailout interventions by governments. Our article develops an interacting heterogeneous agent-based model of interbank credit coordination under minimal institutions. First, we explore the link between interbank credit coordination and the money generation process. Contrary to received wisdom, interbank credit has the capacity to remove the inner limits of monetary system capacitance. Second, we develop simulation analysis on imperfect interbank credit coordination, studying impact of interbank dynamics on financial stability and resilience at individual and aggregate levels. Systemically destabilizing forces prove to be related to the working of the banking system over time, especially interbank coordination conditions and circumstances.
Subjects / Keywordsinterbank credit; money market; payments system; credit network; financial regulation; macroprudential regulation
JELM41 - Accounting
G28 - Government Policy and Regulation
G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
E58 - Central Banks and Their Policies
E51 - Money Supply; Credit; Money Multipliers
E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems
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