Interbank complex network and liquidity creation: Evidence from European banks

Chuangxia Huang; Shumin Tan; Le Li; Jie Cao; Chuangxia Huang; Shumin Tan; Le Li; Jie Cao

doi:10.3934/mbe.2023859

Mathematical Biosciences and Engineering

2023, Volume 20, Issue 11: 19416-19437. doi: 10.3934/mbe.2023859

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Interbank complex network and liquidity creation: Evidence from European banks

1.
School of Mathematics and Statistics, Changsha University of Science and Technology; Hunan Provincial Key Laboratory of Mathematical Modeling and Analysis in Engineering, Changsha 410114, Hunan, China
2.
National University of Defense Technology, Changsha 410003, Hunan, China

Academic Editor: Xiaodi Li
† The authors contributed equally to this work

Received: 05 August 2023 Revised: 24 September 2023 Accepted: 14 September 2023 Published: 19 October 2023

Liquidity creation, as a core functions of banks, affects the stability of the financial system and economic development significantly. However, the existing literature has largely ignored the impact of complex interbank linkages on liquidity creation. This may distort the understanding of liquidity creation away from its essence to some extent in the context of an increasingly interconnected financial system. Using a sample of 1406 banks from 29 European countries during 2010–2021, we use a complex network to model the interbank market and study its impact on liquidity creation. Our results indicate that dominant borrowers in the network create less liquidity as a result of their more prudent liquidity management. Higher bank capital weakens this negative relationship due to its risk-absorbing capacity. Conversely, dominant lenders in the network create more liquidity because of their more optimistic expectations and more lax liquidity management. Higher non-interest income weakens this positive relationship because of the higher risk of non-traditional business, which requires banks to hold more precautionary liquidity. Moreover, we test for endogeneity and use the full sample to verify the robustness of our results.
- complex network,
- topological characteristic,
- liquidity creation,
- Eurozone,
- centrality index
Citation: Chuangxia Huang, Shumin Tan, Le Li, Jie Cao. Interbank complex network and liquidity creation: Evidence from European banks[J]. Mathematical Biosciences and Engineering, 2023, 20(11): 19416-19437. doi: 10.3934/mbe.2023859

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Abstract

Liquidity creation, as a core functions of banks, affects the stability of the financial system and economic development significantly. However, the existing literature has largely ignored the impact of complex interbank linkages on liquidity creation. This may distort the understanding of liquidity creation away from its essence to some extent in the context of an increasingly interconnected financial system. Using a sample of 1406 banks from 29 European countries during 2010–2021, we use a complex network to model the interbank market and study its impact on liquidity creation. Our results indicate that dominant borrowers in the network create less liquidity as a result of their more prudent liquidity management. Higher bank capital weakens this negative relationship due to its risk-absorbing capacity. Conversely, dominant lenders in the network create more liquidity because of their more optimistic expectations and more lax liquidity management. Higher non-interest income weakens this positive relationship because of the higher risk of non-traditional business, which requires banks to hold more precautionary liquidity. Moreover, we test for endogeneity and use the full sample to verify the robustness of our results.

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