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We study the run on the German banking system in 1931 to understand whether depositors anticipate which banks will fail in a major financial crisis. We find that deposits decline by around 20% during the run. There is an equal outflow of retail and nonfinancial wholesale deposits from both failing and surviving banks. In contrast, we find that interbank deposits almost exclusively decline for failing banks. Our evidence suggests that banks are better informed about which fellow banks will fail. In turn, banks being informed allows the interbank market to continue providing liquidity even during times of severe financial distress. [ABSTRACT FROM AUTHOR]

Since the early 2000s, fuzzy mathematics has fostered a stream of research on the financial valuation of assets incorporating optionality. This paper makes two contributions to this field. First, it conducts a bibliographical analysis of contributions from fuzzy set theory to option pricing, focusing on fuzzy-random option pricing (FROP) and its applications in binomial and trinomial lattice approaches. Second, it extends the FROP to yield curve modeling within a binomial framework. The bibliographical analysis followed the PRISMA guidelines and was conducted via the SCOPUS and WoS databases. We present a structured review of papers on FROP in discrete time (FROPDT), identifying the principal papers and outlets. The findings reveal that this focus has been applied to price options on stocks, stock indices, and real options. However, the exploration of its application to the term structure of interest-sensitive interest rate assets is very rare. To address this gap, we develop a fuzzy-random extension of the Ho–Lee term structure model, applying it to the European interbank market and price caplet options. [ABSTRACT FROM AUTHOR]

Banks' refusal to roll over short-term interbank debts has received increased attention since the global financial crisis. Yet, heterodox monetary theories ignore interbank transactions and rollover channels despite recognising the importance of banks' debt-renewal practices. Against this backdrop, this research contextualises banks' refinancing vulnerabilities within heterodox monetary theories and relates them to the literature on rollover-induced interbank frictions. This study also reveals a further shock amplifier. Due to the interplay between maturity-rollover and market-funding liquidity cycles, a rollover-circuit may emerge. This circuit may lead to additional threats to the operation of the interbank market and financial stability, compelling monetary theories not to further neglect banks' refinancing issues. [ABSTRACT FROM AUTHOR]

Network or matrix reconstruction is a general problem that occurs if the row‐ and column sums of a matrix are given, and the matrix entries need to be predicted conditional on the aggregated information. In this paper, we show that the predictions obtained from the iterative proportional fitting procedure (IPFP) or equivalently maximum entropy (ME) can be obtained by restricted maximum likelihood estimation relying on augmented Lagrangian optimization. Based on this equivalence, we extend the framework of network reconstruction, conditional on row and column sums, toward regression, which allows the inclusion of exogenous covariates and bootstrap‐based uncertainty quantification. More specifically, the mean of the regression model leads to the observed row and column margins. To exemplify the approach, we provide a simulation study and investigate interbank lending data, provided by the Bank for International Settlement. This dataset provides full knowledge of the real network and is, therefore, suitable to evaluate the predictions of our approach. It is shown that the inclusion of exogenous information leads to superior predictions in terms of L1 and L2 errors. [ABSTRACT FROM AUTHOR]

Interbank transfer transactions using third-party applications have become a common trend. The relatively high administrative fees for interbank transfers are the reason why people are switching to the Flip application. Flip is an application for transferring money between banks without admin fees. To measure the level of user satisfaction with the Flip application, a satisfaction analysis study was conducted using the PIECES method. The domains to be measured include Performance, Information, Economics, Control, Efficiency, and Service. The data used is the result of questionnaire responses from 100 respondents distributed using Google Forms, with data collection starting from April 28, 2024, to May 11, 2024. The analysis results showed a confidence level in the Flip application of 90%. The analysis and measurement results indicate that customers are very satisfied with the domains of performance, information, economics, control, efficiency, and service. [ABSTRACT FROM AUTHOR]

Since the financial crisis, financial networks, such as interbank lending networks, have been highly concerned by regulators in terms of their vulnerability. To study the risk contagion power of financial networks deeply, this paper integrates short-term and long-term lending data among commercial banks and stress tests the Chinese interbank lending network by using the extended distress and default contagion model. The results show that the reconstructed short-term lending network utilizing information on bank assets exhibits a core–periphery structure with systemically important banks at its core. Stress test results suggest that an interbank lending network that does not consider long-term lending data underestimates the network's systemic risk when market conditions are poor. In addition, we find that the Chinese interbank lending network has gradually become more risk-resistant over time, and the vulnerability of the network after the outbreak of COVID-19 is lower than that before. Finally, we suggest that regulators can make full use of ancillary data, such as long-term interbank lending data, to stress test financial networks, thereby accurately capturing the network's structure and preparing for ex-ante interventions before a crisis strikes to mitigate network systemic risk. [ABSTRACT FROM AUTHOR]

We intend to show the directional volatility spillovers between the European short term interbank lending rates (3‐month Euro Interbank Offered Rate [EURIBOR] and Euro Short‐Term Rate [ESTR]) and the Hungarian Budapest Interbank Offered Rate (BUBOR) and Euro‐Hungarian Forint exchange rate. To determine the extent to which the variables affect each other's volatilities we build a five‐variable vector autoregression (VAR) and determine the spillover table like in Diebold‐Yilmaz's 2012 work. This methodology is preferred to a simple impulse response function (IRF) because we manage to avoid the problem of non‐orthogonal innovations via the generalized forecast error variance decomposition framework. The issue of variable ordering, therefore, does not arise. We focus on three episodes of increased volatility in Hungarian and European short‐term interest rates: Q3–Q4 of 2019, Q1 of 2020 and Q3 of 2022. These episodes correspond to volatility spikes in EU markets that to some extent had a measurable spillover effect on Hungarian interbank rates. We find that on average, across the entire sample of 957 observations, about 6.3% of the volatility forecast error variance in all five European and Hungarian variables comes from spillovers. The total and directional spillovers over the sample are extremely low. We conclude that the European Central Bank's surprise policy decisions have a marginal impact on Hungarian interbank rates. We also find that BUBOR is primarily a net receiver of spillovers from the MAX short‐term government bond benchmark rather than the EURIBOR—this disproved our initial considerations. [ABSTRACT FROM AUTHOR]

In this article we analyze the Hungarian shadow banking system. We point out that the Hungarian shadow banking system is not only much less developed than that of the EU's developed countries, but also structurally different. A further specific feature of the Hungarian financial system is what we call the secondary shadow banking system, through which foreign shadow banking funds do not finance the domestic banking system directly, but through foreign interbank funds and related cross currency basis swaps. The aim of our analysis is to explore the reasons for these specificities, to analyze the risks of the Hungarian shadow banking, and secondary shadow banking systems, and to show that the interconnectedness between banking and shadow banking may not only occur through direct exposure, but also indirectly through the presence of secondary shadow banking. [ABSTRACT FROM AUTHOR]

The study examines the effects of market conditions, volatility and liquidity shocks on the arbitrage profits during pre‐COVID and COVID periods. The study uses a conditional quantile regression and finds no significant difference in the impact of market conditions on the arbitrage profits during pre‐COVID and COVID crisis periods. The increase in volatility combined with low liquidity during the COVID period makes arbitrage non‐viable. However, the decline in volatility during the COVID period encourages investors to initiate arbitrage. The results are useful to fund managers and market analysts to develop suitable trading strategies and stock market regulators to take necessary steps to improve price discovery mechanisms and market efficiency. [ABSTRACT FROM AUTHOR]

We study the effect of generalized exchange as a possible mechanism reproducing the flows of resources among participants in financial markets. In an analysis of on-line trading in a major European interbank market for liquidity, we find that generalized exchange is unlikely to affect sequences of short-term market transactions, but it emerges forcefully in the longer-term. This empirical result is consistent with our predictions that generalized exchange may be understood only with reference to the temporal micro-structure of transactions linking occupants of market roles ("buyers" and "sellers," in our case). We also find that generalized exchange does not affect larger market transactions in the shorter-term, and is unlikely to emerge in the longer-term. This result is consistent with our prediction that generalized exchange does not operate as a stabilizing mechanism for asymmetric market transactions when they involve higher levels of risk. The results of the study clarify how and when context-specific differences in time and value of transactions trigger (or inhibit) generic network mechanisms in decentralized systems of exchange like, for example, markets. • Generalized exchange is a mechanism stabilizing resource flows in financial markets. • Generalized exchange emerges with respect to the temporal structure of transactions. • Generalized exchange discloses with reference to the material context of transactions. • Generalized exchange does not affect large market transactions in the shorter-term. [ABSTRACT FROM AUTHOR]

The transition from term-based reference rates to overnight reference rates has created a dislocation in the market-making processes between the interbank and non-interbank funding, and their respective derivatives markets. This dislocation can be attributed to differences in funding and corresponding interest rate swap transactions, a thesis we explain and characterize in detail. It is then shown how this dislocation may be resolved. Based on a systemic perspective of a stylized financial system, an aggregated banking system is constructed that is void of idiosyncratic credit risks but still vulnerable to liquidity risks. Within this setup, a mathematical modeling framework for term-cognizant interest rate systems is derived that enables the pricing and valuation of bank term funding and associated derivatives transactions with varying liquidity characteristics. Other outcomes include: (i) a detailed analysis of the incomplete market paradigm that encapsulates bank term funding rates and the risk management processes involved therein; and (ii) a recovery of consistency in the pricing and valuation between funding and related interest rate swap transactions, along with a mechanism to exchange term risk. [ABSTRACT FROM AUTHOR]

This paper reveals the impact of environmental, social, and governance (ESG) scores on systematic and downside risks in the Russian stock market. We analyze the influence of a broad set of ESG factors controlling for stock liquidity, financial indicators of companies, and macroeconomic indicators. The period under consideration is from 2013 to 2021. The methodology of our research is based on regression analysis with multiplicative variables to reveal the changes induced by the COVID-19 pandemic. We obtain several novel results. Social responsibility is one of the most significant non-fundamental factors influencing both systematic and downside risks. The most important environment-related component is the measure of a company's propensity to environmental innovations. Some dimensions of stock liquidity are also significant. For some factors, such as the COVID-19 pandemic and debt burden, we find an unexpected direction of influence on liquidity. [ABSTRACT FROM AUTHOR]

Interbank interest rates and Treasury Bill (TB) yields of maturities of three and six months move together, but not 12 months, under a "quantitative and qualitative easing policy." On the other hand, interbank interest rates and TB yields of maturities of 3, 6, and 12 months move together under a "negative interest rate policy." Interbank and TB markets are partially integrated up to the 6‐month maturity as a short‐term money market under a "quantitative and qualitative easing policy," while interbank and TB markets are integrated up to the 12‐month maturity as a short‐term money market under a "negative interest rate policy." This indicates that the arbitrage of interbank and TB markets works. Practitioners of the interbank market are limited to financial institutions, but those of TB markets also include non‐financial institutions. [ABSTRACT FROM AUTHOR]

The aim of the article is to improve the methodology of studying the financial market of Ukraine, analyzing the interaction between the components of the financial market, studying the reaction of the components of the financial market to sudden changes and forecasting the behavior of the structural elements of the financial market. The financial market plays a decisive role in the modern market economy of Ukraine, providing a mechanism for the redistribution of capital between creditors and investors through intermediaries based on the principles of supply and demand. The development of the financial market and the interaction of its components is the subject of research by many scholars, whose works laid the foundation for a modern understanding of how financial markets function and how they affect the economy as a whole. Despite a significant number of studies on the functioning and development of financial market infrastructure, many aspects of the interaction of market entities in Ukraine remain unexplored, especially in changing external and internal conditions. To model the interaction of market participants in the financial market of Ukraine, an algorithm has been developed, on the basis of which the interaction of structural elements of the financial market of Ukraine has been analyzed, the reaction of the components of the financial market to sharp changes has been studied, and forecasts of the behavior of its structural elements have been made. The study uses a combination of fundamental conceptions of the financial market and the methodology of expert evaluation to determine the most significant statistical indicators that characterize its constituent components. The cause-and-effect relationships between these components are analyzed, the nature of their mutual relationship is revealed. ARIMA models were used to forecast key indicators of the financial market. On the basis of vector auto-regressive models, the dynamic adaptation of market components to shocks is analyzed. The study showed that the credit and interbank markets show less susceptibility to external factors and can even serve as impetus for changes in other structural elements of the financial market. The results of the study can be used for: development of a more effective policy of financial market regulation; development of new methods and tools of influence on the functioning of financial market entities. [ABSTRACT FROM AUTHOR]

We employ a multivariate multiplicative error model (MMEM) to explore the interplay between highfrequency return volatilities, trading volume, and trading intensities within the Italian Electronic Interbank Credit Market (e-MID). Our research question also aims at analysing the e-MID and, more specifically, the behaviour of traders in relation to the financial crisis. For this purpose, we consider four time periods: the first period before the first intervention by the ECB, the second period before the collapse of Lehman Brothers, and finally, the last intervention by the ECB. Utilising five-minute intervals, our analysis reveals a robust causal relationship among volatilities, volumes, and trading intensities in this electronic market, yielding highly significant coefficient estimates of the multivariate multiplicative error model (MMEM). However, these relationships change qualitatively, showing a shift in e-MID market behaviour before, during, and after the outbreak of the financial crisis. Notably, we find evidence that trading was in a Pareto optimum in the first period, but as soon as uncertainties hit the market, this Pareto optimum becomes unstable and breaks down completely in the last period of an extremely illiquid market state. To the best of our knowledge, this paper represents the first and inaugural empirical application of MMEM to an interbank credit market, contributing valuable insights into its intricate dynamics. [ABSTRACT FROM AUTHOR]

We investigate the reengineeering of interbank networks with a specific focus on capital increase. We consider a scenario where all other components of the network's infrastructure remain stable (a practical assumption for short-term situations). Our objective is to assess the impact of raising capital on the network's robustness and to address the following key aspects. First, given a predefined target for network robustness, our aim is to achieve this goal optimally, minimizing the required capital increase. Second, in cases where a total capital increase has been determined, the central challenge lies in distributing this increase among the banks in a manner that maximizes the stability of the network. To tackle these challenges, we begin by developing a comprehensive theoretical framework. Subsequently, we formulate an optimization model for the network's redesign. Finally, we apply this framework to practical examples, highlighting its applicability in real-world scenarios. [ABSTRACT FROM AUTHOR]

Global financial cycles have become a growing concern for scholars and policymakers. Recent research has identified these cycles as originating in American markets, at least in part due to policy innovations in the United States. We articulate a previously unidentified, but powerful, mechanism that influence growth (and growth volatility) in the global economy: expansions in the American financial cycle disproportionately affect global credit conditions, leading to a higher incidence of gross capital inflow surges that subsequently create a boom‐bust growth dynamic in recipient economies. We evaluate this argument with an extensive empirical examination of 102 countries from 1975 to 2011 and find substantial support for the argument: US financial market developments produce capital flow cycles that challenge the ability of policymakers to stabilize their macroeconomies. We disaggregate capital flows and find that interbank lending plays a crucial role in driving these outcomes, with the results exhibiting a high degree of robustness to alternative specifications. Domestic policy tools alone may be insufficiently powerful to counteract volatility induced by these capital waves emanating from the core of the global financial system. [ABSTRACT FROM AUTHOR]

We analyze the impact of monetary policy on cross-border bank flows for a large sample of countries over two decades. We find evidence in favor of a cross-border risk-taking channel, as the monetary policy stance of source countries is an important determinant of cross-border bank flows. A relatively tighter monetary policy in source countries prompts banks to reallocate their lending toward safer foreign counterparties. The cross-border reallocation of credit is more pronounced for source countries with lower-capitalized banks. Also, the reallocation is directed toward foreign borrowers in relatively safer destinations, such as advanced economies or economies with investment-grade sovereign ratings. [ABSTRACT FROM AUTHOR]

Exploiting the staggered arrival of fiber-optic submarine cables, we show that high-speed internet promotes the role of banks and credit in Africa. Variation within country and across multicountry bank networks indicates that high-speed internet induced a 22% expansion in credit supply. We investigate the role of plummeting telecommunication costs in promoting the bank adoption of new financial technologies and study a specific technology used in the interbank market, the real-time gross settlement system (RTGS). We find that upon connecting to high-speed internet, banks adopt the RTGS more extensively, reduce inside liquidity, and increase interbank transactions and lending. We also observe that high-speed internet particularly strengthens firms in countries with weak preexisting interbank markets. This paper was accepted by David Sraer, finance. Funding: This work was supported by a Private Enterprise Development in Low Income Countries (PEDL) of the Centre for Economic Policy Research (CEPR) grant and Università Bocconi. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4703. [ABSTRACT FROM AUTHOR]

Purpose: This study investigates the impact of the COVID-19 pandemic on financial stability in Vietnam, a developing country characterized by a bank-based financial system. Design/methodology/approach: Using a sample of daily data from January 23, 2020 to June 30, 2022, the VECM and NARDL models are employed to study Vietnam's financial stability in face of the COVID-19 disaster. Following the literature on COVID-19, the authors measure the impact of the pandemic by the number of daily infected cases and the national lockdown. Given the reliance of the Vietnamese government on the banking system to regulate the economy, the authors evaluate financial stability from the interbank market and stock market perspectives. Findings: The authors find that the pandemic imposes a destructive effect on financial stability during the early time of the pandemic; however, the analysis with an extended period indicates that this effect gradually fades in the long term. In addition, from the NARDL results, the authors reveal an asymmetric relationship between the financial market and the COVID-19 pandemic in both short term and long term. Research limitations/implications: An implication drawn from this study is that unprecedented health disasters should be resolved by unprecedented stringent countermeasures when conventional methods are ineffective. Although rigorous remedies may increase short-term liabilities, their implementation quickly ceases disease diffusion and helps an economy enter the recovery stage in a timelier manner. Originality/value: The study is the first to examine the impact of the COVID-19 pandemic on financial stability, via the interbank market lens, in a developing country that relies on the bank-based financial system. [ABSTRACT FROM AUTHOR]

The research examines the historical evolution and resilience of the Islamic financial system in the face of challenges posed by rising interest rates in the global interbank market. The richness of Islamic legal tradition in financial matters is highlighted, with contributions from Sunni, Shia, and Sufi schools of thought. Despite the challenges, the Islamic financial system has demonstrated a capacity for adaptation and innovation, developing alternative contractual structures that allow it to participate in the international financial market without compromising its fundamental religious principles. Its focus on ethics, social justice, and financial stability makes it an attractive alternative for both Muslim and non-Muslim investors in the pursuit of more sustainable models. However, the need for greater standardisation and harmonisation of Islamic financial practices at a global level is noted. The future of the system will depend on its ability to balance fidelity to its principles with innovation and adaptation to a changing financial environment. Overall, the study underscores the relevance of understanding and appreciating the complexity and richness of the Islamic financial system, which can provide valuable lessons to the global debate on ethics and sustainability in finance. [ABSTRACT FROM AUTHOR]

In the current paper, the authors examined the unsecured interbank deposit market, more specifically, how short-term, passive-side central bank instruments with highly attractive interest rates influence it. They tested the hypothesis that instruments of this type impose a quasi-manual control and reduce the activity on the interbank market. They considered the post-2013 Hungarian monetary policy as a crucial case. The one-week central bank deposit rate introduced in April 2020 and the one-day deposit rate applied from October 2022 both represent the subject of the investigation. Through network analysis, the authors proved that the one-week deposit rate exerted effects over the period March–December 2020, in line with their hypothesis. The liquidity of the interbank market deteriorated accordingly, and the opportunity to manage liquidity needs through the interbank market narrowed. They conclude that short-term, passive-side central bank instruments such as an especially high interest rate should be used only on a temporary basis. [ABSTRACT FROM AUTHOR]

The main goal of this paper is to identify and analyze the key mechanisms that can lead to financial contagion and their function in the dissemination of shocks within the financial system. The key mechanisms discussed in the paper include interbank lending, bank runs, asset price contagion, the role of asymmetric information, moral hazard and heard behavior among the investors. By exploring these mechanisms, the paper seeks to enhance the understanding of how shocks are transmitted and intensified within the financial system. To achieve the aim of this paper, secondary research was conducted, utilizing relevant research papers, conference papers, open-access materials, and study reports relating to the research topic. The findings draw attention to the possibility of banking system contagion effects, especially due to interbank credit exposures, which might affect a small number of banks and potentially spread to a large amount of the system. The incidence of bank runs, which are brought on by economic instability and a lack of faith in the banking system, worsens the spread of shocks. Additionally, the spread of contagion, which results in market crashes and price spillovers, can be aided by investor herding behavior and confusion brought on by asymmetric information. [ABSTRACT FROM AUTHOR]

Purpose: This paper aims to achieve two goals: first, to evaluate the existing interest-free monetary policy tools in the major Islamic financial hubs of Malaysia, Pakistan and Bahrain and; second, to suggest how monetary policy tools in Turkey can be used in other countries. Design/methodology/approach: This study follows a qualitative research method based on literature review, comparison, evaluation and design. Findings: The policy rate cannot be used due to Shariah concerns. The reserve requirement depends on qard, and the reserves should be kept separately in the central bank. In terms of ijarah sukuk, Shariah concerns should be taken into account and a new structure, as displayed in Figure 3, should be followed. Government investment certificates can be used as an interest-free monetary policy tool. A genuine mudarabah interbank investments can also be used. Wadiah acceptance with no habitual gift can be used as well, and Tawarruq and central bank notes are not preferable due to Shariah concerns as well. Having said that, a Turkey-based tawarruq platform can be structured for others to use instead of applying to London. Originality/value: This paper's unique suggestion is to develop an interbank taqaruz market and a taqaruz method with the central bank. It is also unique for Turkey in the subject. [ABSTRACT FROM AUTHOR]

This study uses a high‐dimensional time‐frequency volatility spillover model to examine risk interactions across 32 global stock and credit default swap (CDS) markets during the coronavirus (COVID‐19) pandemic. Our empirical results mainly show that cross‐market risk spillovers between these two types of markets are rare over the whole crisis period. Adding CDS assets to the stock portfolio would significantly decrease the overall risk spillovers in the mixed portfolio. Then, the time‐frequency spillover and rolling window analyses confirm this finding and provide further evidence of frequency heterogeneity of risk spillovers during the pandemic. The outbreak of the COVID pandemic only sharply increases short‐term risk spillovers between the stock and sovereign CDS market but exerts insignificant impacts on the medium and long‐term cross‐market risk spillovers. Moreover, our results show that developed countries are net transmitters in the stock markets. In contrast, the emerging markets account for the most risk spillovers in sovereign CDS markets over the sample period, emphasizing the heterogenous adverse impacts of the pandemic across various countries and markets. Finally, we find that bailouts implemented by the US and EU central banks, though with heterogeneous impacts across frequencies, gradually enhance the confidence and resilience of investors in these markets. [ABSTRACT FROM AUTHOR]

Considering financial contagion has ripple effects, this paper proposes using contagion ripple-spreading network model to reveal the paths of financial contagion from different contagion source to the whole Chinese financial system, and study financial institutions' systemic importance. We first study the contagion ripple-spreading process triggered by oil market. Then we select four financial institutions from banks, brokerages, insurance and other institutions as contagion source respectively to study the how contagion will spread once these financial institutions trigger financial contagion. Finally, centrality comprehensive evaluation method is applied with heterogeneous networks generated from different contagion ripple-spreading processes to study the institutions' systemic importance. The empirical results show that the contagion triggered by oil market first spreads to other financial institutions, and then to banks, brokerages and insurance. The contagion triggered by a financial institution first spreads in financial sectors that the contagion source belongs to, and then to other sectors. Moreover, most brokerages and banks have highest systemic importance. Insurance and the rest of brokerages, banks have middle level of systemic importance. Other financial institutions are the least important institutions. [ABSTRACT FROM AUTHOR]

The paper has two main objectives: one, to investigate if inter-bank horizontal dispersion in the remuneration of executives has any significant influence on bank performance. And two, to explore various situations with respect to board quality, agency cost, and government ownership under which the dispersion-performance nexus is moderated. The paper employs a two-step system GMM of (Blundell and Bond, Journal of Econometrics 8:115–143, 1998) to account for the possible endogeneity issues, and Driscoll–Kraay's non-parametric matrix estimator to account for cross-sectional dependence. The findings show that horizontal pay dispersion has a negative influence on bank performance. It produces evidence in favor of the "equity fairness theory" that higher pay dispersion would incentivize them to engage in excessive risk-taking for maximizing their personal interests, which emerges to be detrimental to the bank's performance. Further evidence of moderating effect shows that in the presence of effective board oversight, pay dispersion exerts a favorable influence on the performance of Indian banking firms. The research has significant policy ramifications for regulators to apprehend the undesirable implications of pay dispersion on bank performance and initiate quick action to scrutinize the governance practices of higher-paying banks. [ABSTRACT FROM AUTHOR]

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Motivated by an original financial network dataset, we develop a statistical methodology to study non-negatively weighted temporal networks. We focus on the characterization of how nodes (i.e. financial institutions) concentrate or diversify the weights of their connections (i.e. exposures) among neighbors. The approach takes into account temporal trends and nodes' random effects. We consider a family of nested models on which we define and validate a model-selection procedure that can identify those models that are relevant for the analysis. We apply the methodology to an original dataset describing the mutual claims and exposures of Austrian financial institutions between 2008 and 2011. This period allows us to study the results in the context of the financial crisis in 2008 as well as the European sovereign debt crisis in 2011. Our results highlight that the network is very heterogeneous with regard to how nodes send, and in particular receive edges. Also, our results show that this heterogeneity does not follow a significant temporal trend, and so it remains approximately stable over the time span considered. [ABSTRACT FROM AUTHOR]

Considering two risk contagion channels, namely interbank lending and common asset holdings, we introduce the bank's default probability into the DebtRank model to construct an improved one and measured the bank's systemic risk using the data of China's banking industry from 2016 to 2018. The research results indicate that the bank's systemic risk from two risk contagion channels is significantly greater than the sum of risks from every single channel. The original DebtRank that takes only a single risk contagion channel into account will underestimate the bank's systemic risk. In addition, state-owned commercial banks and joint-stock commercial banks are the risk centers of China's banking system, whose systemic importance changes dynamically. Furthermore, the ranking of the TLAC gaps show correlation with the ranking of the DebtRanks of Chinese G-SIBs. The results of this paper will provide a new way and a theoretical basis for identifying systemically important banks and strengthening the supervision of the banking system. [ABSTRACT FROM AUTHOR]

Interbanking rates were, until recently, based on judgmental estimates of borrowing costs. We interpret this as a cheap-talk game that allowed banks to communicate nonverifiable information about their opportunity cost to potential counterparties. Under normal market conditions there is a welfare maximizing equilibrium where banks truthfully disclose their borrowing cost, but, in times of financial stress, only "coarse" equilibria survive. We take this prediction to the data and show that banks round more frequently if the risk of the bank increases. Rounding is also more frequent for the more liquid short-term rates and certain benchmark maturities. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online. [ABSTRACT FROM AUTHOR]

In this paper, an adaptive endogenous model is introduced to explain the formation and evolution mechanism of interbank lending market with central bank. We investigate the evolution of structure of interbank lending market and the impact of structure of bank assets, bank adaptive behaviors, liquidity and dispersion on the resilience of interbank lending market, respectively. Simulation results demonstrate that the structure of the initial interbank lending market has scale-free and small-world features, which keeps in the evolution of the network. Moreover, we find risk gathering requires relatively long time but the outbreak is concentrated and percentage of defaults is a nonmonotonic function of percentage of initial liquid assets. Furthermore, we discover that moderate liquidity hoarding helps to reduce risk contagion effect in the initial stage of contagion while excessive hoarding of liquidity increases the fragility of the network. [ABSTRACT FROM AUTHOR]

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. [ABSTRACT FROM AUTHOR]

Problem definition: The paper focuses on an innovative bank-intermediated trade finance contract, which we call dynamic trade finance (DTF, under which banks dynamically adjust loan interest rates as an order passes through different steps in the trade process). We examine the value of DTF, the impact of process uncertainties, and the associated information frictions on this value and the strategic interaction between DTF and FinTech. Academic/practical relevance: As more than 30% of global trade involves bank-intermediated trade finance, examining contract innovation in trade finance (DTF) and its strategic interaction with FinTech is of practical importance. Also, analyzing trade finance in the presence of process dynamics and information frictions complements the existing academic literature. Methodology: We construct a parsimonious model of a supply chain process consisting of two steps. The duration of each step is uncertain, and the process may fail at either step. Information delay may also occur when verifying the process passing a step. The seller borrows from a bank to finance this two-step process either through uniform financing (the interest rate remains constant throughout the process) or DTF (the interest rates are adjusted according to a precommitted schedule as the process passes each step). When lending, the bank faces a regulatory capital requirement (the bank is required to hold capital reserve when issuing risky loans) or information asymmetry (the seller/borrower possesses more accurate information about the trade process than the bank). Results: The value of DTF lies in its ability to reduce transactional deadweight loss (under the regulatory capital requirement) and screening (separate high-quality borrowers from the low-quality ones under information asymmetry). This value is greater for more reliable or lengthier trade processes, yet DTF's ability to screen is stronger when the process is less reliable. The severity of information delay hurts the value of DTF convexly. FinTech that expedites information transmission and verification and enables automatic execution complements DTF, and those that segment customers more efficiently could substitute DTF. Managerial implications: Our results shed light on how the underlying trade process dynamics and the type of information frictions involved affect the optimal deployment of contract innovations (DTF) and FinTech in trade finance. History: This paper has been accepted for the Manufacturing & Service Operations Management Special Section on the Interface of Operations, Finance and Technology. Funding: This work was supported by National Natural Science Foundation of China [Grant 72201060], London Business School, the University of Hong Kong, and the University of International Business and Economics. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2022.1102. [ABSTRACT FROM AUTHOR]

Based on the overall data of inter-bank assets and inter-bank liabilities of China’s commercial banks, the inter-bank borrowing-lending correlation network is inferred indirectly by the maximum entropy method, and the distress propagation process under a single shock or common shocks is investigated based on the DebtRank algorithm. The systemic impact and vulnerability of banks and their influencing factors are also investigated. The empirical results show that under certain circumstances, the negative results brought by bank distress are more severe than those brought by bank default. China’s commercial banks are not located in the area of “high vulnerability/strong impact”, indicating that China’s banking system is relatively safe. In terms of influencing factors, the average return on assets has a significant negative effect on banks’ systemic impact, while the loan reserve ratio, the tier-one leverage capital ratio and the inter-bank lending volume have significant positive effect on banks’ systemic impact. The tier-one leverage capital ratio and asset size have significant negative effect on the systemic vulnerability and the inter-bank lending volume has significant positive effect on the systemic vulnerability. The results not only help banks to understand their own situations, but also provide a basis for financial regulation. [ABSTRACT FROM AUTHOR]

This paper empirically explores dynamic risk impact of extreme volatility between stock and foreign exchange markets in emerging markets. Based on CoVaR analysis, we construct networks to investigate the nonlinear and dynamic evolution characteristics of risk contagion. The results show that stock and foreign exchange markets exhibit asymmetric tail dependence. All networks present small world network characteristics. The risk tolerance impact is more noticeable than risk overflow and stock markets are more sensitive to risk contagion. In the minimum spanning tree (MST), Korean stock market and foreign exchange markets of India and China are critical nodes in the minimum path of risk overflow. [ABSTRACT FROM AUTHOR]

Purpose: This paper aims to examine the dynamic spillover effects and network connectedness between the oil prices and the Islamic and conventional financial markets in the Gulf Cooperation Council countries. The focus is on network connectedness during the 2008–2009 global financial crisis, the 2014–2016 oil crisis and the COVID-19 pandemic. The authors use daily data covering the period from January 1, 2007 to April 14, 2022. Design/methodology/approach: This study applies a spillover analysis and connectedness network to investigate the risk contagion among the Islamic and conventional stock–bond markets. The authors rely on Diebold and Yilmaz's (2012, 2014) methodology to construct network-associated measures. Findings: The results suggest that overall connectedness among financial market uncertainties increased during the global financial crisis, the oil price collapse of 2014–2016 and the COVID-19 crisis. In addition, the authors show that the contribution of oil shocks to the financial system is limited, as the oil market was a net receiver during the 2014 oil shock and the COVID-19 crisis. On the other hand, the Islamic and conventional stock markets are extensive sources of network effects on the oil market and Islamic and conventional bond markets. Furthermore, the authors found that the Sukuk market was significantly affected by the COVID-19 pandemic, whereas the conventional and Islamic stock markets were the highest transmitters of shocks during the COVID-19 pandemic outbreak. Moreover, oil revealed a weak connectedness with the Islamic and conventional stock markets during the COVID-19 health crisis, implying that it helps provide diversification benefits for international portfolio investors. Originality/value: This study contributes to this field by improving the understanding of the effect of fluctuations in oil prices on the dynamics of the volatility connection between oil and Islamic and conventional financial markets during times of stress through a network connectedness framework. The main results of this study highlight the role of oil in portfolio allocation and risk minimization when investing in Islamic and conventional assets. [ABSTRACT FROM AUTHOR]

The transition from interbank offered rates (IBOR) to the new risk-free rates, and in particular the adoption of the backward-looking approach in place of the forward-looking one, affects the interest rate modeling and the pricing of interest rate derivatives. In this article, we introduce the pricing formula for caplets/floorlets with backward-looking risk-free rates under the one- and two-factor Hull-White model. In particular, we derive the appropriate volatility function for caplets/floorlets to be used in the pricing formula under the two-factor Hull-White model and, implicitly, under the one-factor Hull-White model. Our formulation allows us to obtain, as a particular case, the caplet/floorlet formula under the IBOR environment with a forward-looking rates approach. A numerical analysis is performed to illustrate the main feature of the proposed model and in order to provide a comparison in evaluating caplets/floorlets under both forward-looking and backward-looking approaches. [ABSTRACT FROM AUTHOR]

This paper studies a class of partial information linear-quadratic mean-field game problems. A general stochastic large population system is considered, where the diffusion term of the dynamic of each agent can depend on the state and control. We study both the control constrained case and the unconstrained case. In the control constrained case, by using a Hamiltonian approach and convex analysis, the explicit decentralized strategies can be obtained through a projection operator. The corresponding Hamiltonian type consistency condition system is derived, which turns out to be a nonlinear mean-field forward-backward stochastic differential equation with projection operator. The well-posedness of such equations is proved by using a discounting method. Moreover, the corresponding E-varepsilon -Nash equilibrium property is verified. In the control unconstrained case, the decentralized strategies can be further represented explicitly as the feedback of the filtered state through a Riccati approach. The existence and uniqueness of a solution to a new Riccati type consistency condition system is also discussed. As an application, a general interbank borrowing and lending problem is studied to illustrate that the effect of partial information cannot be ignored. [ABSTRACT FROM AUTHOR]

We introduce a particular heterogeneous formulation of a class of contagious McKean–Vlasov systems, whose inherent heterogeneity comes from asymmetric interactions with a natural and highly tractable structure. It is shown that this formulation characterises the limit points of a finite particle system, deriving from a balance-sheet-based model of solvency contagion in interbank markets, where banks have heterogeneous exposure to and impact on the distress within the system. We also provide a simple result on global uniqueness for the full problem with common noise under a smallness condition on the strength of interactions, and we show that in the problem without common noise, there is a unique differentiable solution up to an explosion time. Finally, we discuss an intuitive and consistent way of specifying how the system should jump to resolve an instability when the contagious pressures become too large. This is known to happen even in the homogeneous version of the problem, where jumps are specified by a 'physical' notion of solution, but no such notion currently exists for a heterogeneous formulation of the system. [ABSTRACT FROM AUTHOR]

Purpose: The study attempts to identify the linkages in the term structure of illiquidity and the impact of global and domestic factors on sovereign bonds in emerging Asia. The objective of the study ensues on defining the direction of illiquidity spillover across bonds of varying tenors. Design/methodology/approach: This study explores the joint dynamics of contemporary liquidity risk premia and its time-varying effect on the term structure spectrum using the Diebold and Yilmaz (2012) spillover framework. Findings: A substantial relationship was found to exist between the liquidity of bonds with closer terms to maturity. The macroeconomic environment primarily impacts the liquidity of 10-year bonds, and they spiral down to the subsequent bond liquidity, exhibiting a rippling effect. The authors further show that the direction of liquidity shock transmission is from long- to medium- and thence to short-term bonds. Among the global factors, foreign investments and S & P 500 VIX significantly affect the liquidity of 10-year bonds. Research limitations/implications: The study has several implications for academicians, policymakers and domestic and global investment professionals. The drivers of liquidity risk and the transmission across the term structure help investors in designing efficient portfolio diversification strategies. The results are relevant for cross-border investors in the valuation of emerging Asian sovereign bonds while deciding on asset allocations and hedging strategies. The monetary regulators strive on a continuous basis to improve the liquidity in sovereign bond markets in order to ensure efficient funding of development activities. This study finds that short-term bonds are more liquid than long-term bonds. Their auction framework with higher series of short-term bond issues helps to provide the required liquidity in the markets. Practical implications: The term structure of illiquidity is upward sloping, inferring a higher underlying liquidity risk of long-term bonds compared to short-term bonds. This finding suggests that a higher representation of short-term bonds in the auction framework helps to enhance the overall market liquidity. Originality/value: This study offers insights into the debate on the shape of the term structure of illiquidity and the point of origination of liquidity shocks. Further, the direction of spillover across a wide spectrum of bonds is also demonstrated. [ABSTRACT FROM AUTHOR]

The purpose of this paper is to study the spillover effects of financial stress among five important financial markets (bond, stock, foreign exchange, interbank, and real estate markets) in China, and explore the important determinants of financial stress spillover level among the markets and the impact of the Chinese stress spillover situation on the European markets. Our findings are as follows: First, there is a significant stress spillover effect among the five markets, and the total financial stress spillover index (TSSI) is very high during the global financial crisis. Generally, the stock and real estate markets are the major transmitters of stress spillover, and the interbank and bond markets are the major receivers. Second, the most macro factors have significant impacts on the financial stress spillover level among the markets, especially CPI index, the Chinese economic policy uncertainty index and VIX index. And the severity of the COVID-19 epidemic in China and the world has a significant impact on the TSSI, especially from March 2020 to August 2020. Finally, the TSSI can significantly increase the volatility of French stock market, Italian stock market and German government bond market, especially during the Sino-US trade war and the COVID-19 epidemic. [ABSTRACT FROM AUTHOR]

We study the transmission of exchange rate shocks in the Turkish interbank loan market using high-frequency bank-level data. Our results suggest that interbank market plays a stabilizing role: following large domestic currency depreciations, banks with a higher share of foreign currency liabilities borrow more in the interbank market, with a higher but insignificant effect on borrowing costs. The results are stronger the larger the exchange rate shock is and the lower the capital adequacy or liquidity ratios of borrower banks. Interbank markets play a weaker stabilizing role for banks with higher short-term rollover risks. [ABSTRACT FROM AUTHOR]

We examine whether a concentrated interbank market stimulates bank collusion or monopolistic pricing towards enhancing performance. We explore this nexus by incorporating the role of bank conduct into the structure–performance paradigm. The results show that the interbank market structure provides a channel for banks to collude and engage in monopolistic pricing in the market for bank and business loans to consequently increase bank performance. Further, while the interbank market structure is both profit and cost efficient for non-conglomerate banks, it is cost efficient for foreign banks. Hence, collusion and other anti-competitive behaviours in the interbank market may exacerbate incentives for foreign and non-conglomerate bank entry. We also explored the theoretical and policy implications of these findings. Our results are robust to alternative measures of market structure, bank conduct and performance, and the use of a wide range of specifications and econometric models. [ABSTRACT FROM AUTHOR]

The World Banking with its various financial services is an easy target for fraudsters to carry out their actions. Various kinds of fraud that occurred such as credit card fraud, online payment fraud, debit card fraud, online transaction fraud, e-commerce fraud and other services including interbank online transactions. Fast and reliable fraud detection is important because many financial losses have occurred due to fraud. The objective of this study is obtaining a more effective deep learning model for fraud detection in the interbank online transaction system compared to similar models. This study using CNN, LSTM and hybrid model CNN-LSTM models are used to build an interbank online transaction system. The proposed model CNN consist of three convolution layer, one maxpooling layer, one dropout layer and one fully connected layer. The proposed model LSTM built by double layer LSTM with each layer consist 32 cell LSTM, dropout layer and one fully connected layer. The proposed model CNN-LSTM built by combination three convolution layer, 1 maxpooling layer, dropout layer, 1 LSTM layer with 64 LSTM cell and one fully connected layer. The Dataset taken from an interbank online transaction in March 2021 from one of the switching company in Indonesia. SMOTE is use to overcome the imbalance Dataset in training and validation Dataset. The Dataset contains 279513 transactions with 2374 transactions categorized as fraud. The results showed that the CNN model scored an F1-score value at 93,09%, followed by the LSTM model at 86,25% and the CNN-LSTM hybrid model at 69,22%. Based on these results, the proposed CNN model can be accurate for fraud detection in interbank online transaction systems compared to similar models. [ABSTRACT FROM AUTHOR]