Interbank Networks in the Shadows of the Federal Reserve Act

Abstract

Public liquidity provision is segmented. Some financial intermediaries access it directly through central banks, while the rest access it indirectly through interbank relationships. We collect unique historical data on the payments and funding networks of Virginia state banks, and show that the creation of the Federal Reserve changed the nature and structure of the interbank system. It encouraged banks to rely more on short-term borrowing and less on interbank deposits to manage liquidity and reduced the concentration of interbank linkages in New York. We develop a model that shows how public liquidity provision affects the interbank system and financial stability.

Keywords: Dual banking system, Federal Reserve Act, Shadow Banking, Interbank Networks, Systemic Risk

JEL Classification: G20, E50, N22