City Research Online

Abstract

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.

Publication Type:	Article
Additional Information:	This is a post-peer-review, pre-copyedit version of an article published in Journal of Economic Interaction and Coordination. The final authenticated version is available online at: https://doi.org/10.1007/s11403-018-0230-y.
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School
SWORD Depositor:	Symplectic Administrator

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