Liquidity, Interbank Network Topology and Bank Capital

URL des Documents de travail : https://centredeconomiesorbonne.cnrs.fr/publications/Documents de travail du Centre d'Economie de la Sorbonne 2020.22R - ISSN : 1955-611X Version originale Octobre 2020, révisée en Décembre 2020By applying the interbank network simulation, this paper examines whether the causal relationship between capital and liquidity is influenced by bank positions in the interbank network. While existing literature highlights the causal relationship that moves from liquidity to capital, the question of how interbank network characteristics affect this relationship remains unclear. Using a sample of commercial banks from 28 European countries, this paper suggests that banks' interconnectedness within interbank loan and deposit networks affects their decisions to set higher or lower regulatory capital rations when facing higher illiquidity. This study provides support for the need to implement minimum liquidity ratios to complement capital ratios, as stressed by the Basel Committee on Banking Regulation and Supervision. This paper also highlights the need for regulatory authorities to consider the network characteristics of banks