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

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.

Citation

Bai, Y., Weiss, P., Murinde, V., & Green, C. J. (2023). Bank stability in the uncollateralised overnight interbank market: A topological analysis. International Review of Economics and Finance, 88, 1223-1246. https://doi.org/10.1016/j.iref.2023.07.063

• Journal Article Type: Article
• Acceptance Date: Jul 24, 2023
• Online Publication Date: Jul 27, 2023
• Publication Date: 2023-11
• Deposit Date: Oct 5, 2023
• Publicly Available Date: Oct 5, 2023
• Journal: International Review of Economics and Finance
• Print ISSN: 1059-0560
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 88
• Pages: 1223-1246
• DOI: https://doi.org/10.1016/j.iref.2023.07.063
• Keywords: Interbank market, Network topology, Liquidity shocks, Bank stability, Kenya
• Public URL: https://nottingham-repository.worktribe.com/output/23845714
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S1059056023002745?via%3Dihub