Interbank Networks in the Shadows of the Federal Reserve Act

58 Pages Posted: 6 May 2019 Last revised: 18 Mar 2022

See all articles by Haelim Anderson

Haelim Anderson

Government of the United States of America – Federal Deposit Insurance Corporation; Yale University - Yale Program on Financial Stability

Selman Erol

Carnegie Mellon University - David A. Tepper School of Business

Guillermo Ordoñez

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: August 14, 2020

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

Suggested Citation

Anderson, Haelim and Erol, Selman and Ordoñez, Guillermo, Interbank Networks in the Shadows of the Federal Reserve Act (August 14, 2020). Available at SSRN: https://ssrn.com/abstract=3367203 or http://dx.doi.org/10.2139/ssrn.3367203

Haelim Anderson

Government of the United States of America – Federal Deposit Insurance Corporation ( email )

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Washington, DC 20429
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Yale University - Yale Program on Financial Stability ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
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Selman Erol (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

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Pittsburgh, PA 15213-3890
United States

Guillermo Ordoñez

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
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Philadelphia, PA 19104-6297
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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