DP17263 Trust and the Interbank Market Puzzle

Author(s): Franklin Allen, Giovanni Covi, Xian Gu, Oskar Kowalewski, Mattia Montagna
Publication Date: April 2022
Keyword(s): Centrality, Community detection, interbank market, networks, Trust
JEL(s): G01, G21, G28
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17263

This study documents significant differences in the size of interbank markets across countries. We argue the differences can be explained by the trust in the financial systems, proxied by the history of banking crises and failures. Banks from a country with lower trust tend to have lower interbank borrowing. Using a proprietary dataset on bilateral exposures, we investigate the Euro Area interbank network and find the effect of trust relies on the interbank network structure. Core banks as intermediaries are more significantly influenced by trust while being more exposed in a community can mitigate the negative effect of low trust.