Interbank loans, collateral and modern monetary policy

Authored by Marcin Wolski, de Leur Michiel van

Date Published: 2016

DOI: 10.1016/j.jedc.2016.10.002

Sponsors: European Union European Central Bank

Platforms: No platforms listed

Model Documentation: Other Narrative Mathematical description

Model Code URLs: Model code not found

Abstract

This study develops a novel agent-based model of the interbank market with endogenous credit risk formation mechanisms. We allow banks to exchange funds through unsecured and secured transactions, which facilitates the flow of funds to the most profitable investment projects. Risk premiums result from banks' forecasting rules and depend on past performance of the benchmark risk factors and interest rates. Our model confirms basic stylized facts of the interbank interest rates and volumes. We also find that network structures within the secured market segment are characterized by the presence of dealer banks, while we do not observe similar patterns in the unsecured market. We perturb the model with exogenous shocks and policy scenarios which correspond to unconventional monetary policies. (C) 2016 Elsevier B.V. All rights reserved.

Tags

Liquidity networks Financial accelerator Systemic risk Contagion Money market Repo