Equilibrium interbank lending networks

We propose a model to study short-term interbanklending from a network formation perspective. Banks, beingprovided with public and private signals about the solvency ofother banks, decide on interbank lending by also considering thedecision of other banks to lend. We observe that the dominantequilibrium networks are those where banks follow each others'decisions, making the equilibria very vulnerable to shifts inexpectations. The networks range from fully connected (highlyliquid markets) to empty networks (frozen markets) and wederive the conditions under which they emerge

Equilibrium interbank lending networks

We propose a model to study short-term interbanklending from a network formation perspective. Banks, beingprovided with public and private signals about the solvency ofother banks, decide on interbank lending by also considering thedecision of other banks to lend. We observe that the dominantequilibrium networks are those where banks follow each others'decisions, making the equilibria very vulnerable to shifts inexpectations. The networks range from fully connected (highlyliquid markets) to empty networks (frozen markets) and wederive the conditions under which they emerge