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The Belgian Interbank Market: Interbank Linkages and Systemic Risk

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Abstract

FSR 2003 EN page de garde 105 BELGIAN INTERBANK MARKETBELGIAN INTERBANK MARKET 1. Introduction Interbank markets play a major role in the functioning of the fi nancial system. They provide an effective way of transferring liquidity from banks with a cash surplus to those with a cash defi cit. At the macro-economic level, interbank markets strengthen fi nancial integration but they also increase linkages and common exposures to risks within the banking sector. At the micro-economic level, individual institutions make use of interbank markets for their liquidity and risk management. As a consequence, these markets represent one of the most important chan- nels of contagion through which problems affecting one bank/country may spread to other banks / countries. In the same spirit as analyses undertaken by other cen- tral banks (1), this paper addresses implications of Belgian interbank linkages for fi nancial stability. The main objec- tive is to evaluate the risk that a chain reaction in the interbank market − i.e., a situation where the failure of one bank would lead to problems among one or more of its interbank creditors − could create wider systemic risk in Belgium. The Belgian interbank market (2) is very international and highly concentrated. This observation raises several interesting questions. How have consolidation and inter- nationalisation affected the interbank market ? To what extent could the failure of banks in another European country’s banking system affect Belgian banks through interbank exposures ? How has interbank contagion risk evolved over time? How does the assessment of conta- gion risk in Belgium compare with assessments in other countries ? Bank failures have historically been rare events, even more so in Belgium than in many other countries. Yet, because bank failures are not impossible, understanding the potential channels through which the failure of one bank (foreign or domestic) might affect Belgian banks is an important aspe

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