Essays on bank network characteristics : implications for bank capital and liquidity regulation and for monetary policy.

Summary The objective of this thesis is to provide an assessment of the importance of banking network characteristics in explaining the decision making of banks under different macroprudential and monetary policy scenarios. This thesis therefore examines the implications of interbank network topology for bank capital and liquidity regulation and monetary policy. The first chapter examines how banks define their liquidity ratios based on the topology of their network in the interbank market. Our results show that taking into account bank connections within a network significantly improves traditional liquidity models. Moreover, we show that banks set a lower liquidity ratio when they have easier access to the interbank market. Our results also highlight that the liquidity behavior of banks of different sizes or banks operating in different banking systems could vary depending on their local or system-wide interbank positions. The second chapter analyzes the response of bank stock prices to monetary policy announcements as a function of their interbank market position. Our results show that taking into account how banks are linked within a network helps explain the reaction of their stock prices to monetary policy announcements. Our results suggest that a strong system-wide network position increases positive reactions to such policy announcements, while a strong local network position reduces them. The third chapter examines how the substitution effects of liquidity on capital are affected by the bank's position in the interbank market. We show that the substitution effect of liquidity on capital is attenuated if banks are highly interconnected in the interbank network. Our results suggest that in times of crisis, large illiquid banks hold a high capital ratio only when they have a weak position in the interbank network at the local or system-wide level, while small illiquid banks strengthen their solvency when they have a larger number of direct borrowers .