Its been three months since the last “Research update” and a number of interesting papers have been published meanwhile. Please let me know if you have one to add.

An agent-based model of payment systems by Marco Galbiati and Kimmo Soramäki (Journal of Economic Dynamics and Control) builds an agent based model where banks choose the amount of liquidity to settle a given flow of payments. The paper pays special attention to a realistic settlement process with complex dynamics and studies the equilibrium level of liquidity that is a result of the game between the banks. The paper investigates liquidity usage with various system sizes and volumes, and under different liquidity cost parameters.

The Brazilian Interbank Network Structure and Systemic Risk by  Edson Bastos e Santos and Rama Cont (Banco Central do Brasil Working Paper 219) uses unique data on bilateral exposures between financial institutions in Brazil. They explore the empirical properties of the network and relate them to capital structure of the banks. They find that the network is best modeled as a directed scale-free (weighted) graph with heavy tailed degree and weight distributions.

Network Structure and Systemic Risk in Banking Systems by Rama Cont, Amal Moussa and Edson Bastos e Santos studies the potential for default contagion using the same data set as above. They find that network-based measures of connectivity and concentration of exposures contribute to the systemic importance of an institution.  Imposing capital measures on the basis of the network based “Contagion index” allows a lower level of capital across the system for given level of protection than imposing them uniformly across all banks.

Norwegian overnight interbank interest rates by Akram, Q. Farooq and Casper Christophersen (Norges Bank Staff Memo) infers actual interest rates from the advances and returns settled in the Norwegian payment system and proposes a new overnight interest rate based upon them (NONIA). The paper investigates the properties and evaluates the reliability of the interest rate both under normal conditions and during the recent financial crisis.

Mapping Systemic Risk in the International Banking Network by Rod Garrett, Lavan Mahadeva and Katya Svirydenska (Bank of England Working Paper) partitions banking groups from 21 countries into modules that reflect the ease at which stress is transmitted between the banks within a cluster. They use BIS data on international banking group exposures and find substantial changes over the time period of 1985 to 2009. The image below shows the network in Q3 of 2009.

Monitoring the unsecured interbank money market using TARGET2 data by Ronald Heijmans, Richard Heuver and Daniëlle Walraven (DNB Working Papers, No 276) extends the algorithm by Furfine (1999) and identifies loans between Dutch banks up to a maturity of one year. Based on the new algorithm they develop a policy tool to monitor the interbank money market, both at the level of the market and at individual banks. (Note: the match -command in FNA provides a similar algorithm as the one used in their paper)