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Interbank Decisions and Margins of Stability: an Agent-Based Stock-Flow Consistent Approach

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  • Reale, Jessica
Abstract
This study investigates the functioning of modern payment systems through the lens of banks' maturity mismatch practices, and it examines the effects of banks' refusal to roll over short-term interbank liabilities on financial stability. Within an agent-based stock-flow consistent framework, banks can engage in two segments of the interbank market that differ in maturity, overnight and term. We compare two interbank matching scenarios to assess how bank-specific maturity targets, dependent on the dictates of the Net Stable Funding Ratio, impact the dynamics of the interbank market and the effectiveness of conventional monetary policies. The findings reveal that maturity misalignment between deficit and surplus banks compromises the interbank market's efficiency and increases reliance on the central bank's standing facilities. Monetary policy interest-rate steering practices also become less effective. The study also uncovers a dual stability-based configuration in the banking sector, resembling the segmented European interbank structure. This paper suggests that heterogeneous maturity mismatches between surplus and deficit banks may result in asymmetric funding frictions that might precede credit- and sovereign-risk explanations of interbank tensions. Also, a combined examination of macroprudential tools and rollover-based interbank dynamics can enhance our understanding of how regulatory changes impact the stability of heterogeneous banking sectors.

Suggested Citation

  • Reale, Jessica, 2024. "Interbank Decisions and Margins of Stability: an Agent-Based Stock-Flow Consistent Approach," Journal of Economic Dynamics and Control, Elsevier, vol. 160(C).
    • Handle: RePEc:eee:dyncon:v:160:y:2024:i:c:s0165188924000149
    DOI: 10.1016/j.jedc.2024.104822
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    More about this item

    Keywords

    Interbank market; Monetary policy; Rollover risk; Stock-flow consistent models; Complex systems;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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