The International Interbank-Market and the Stability of the Banking System

Abstract

The subject of this study is the relation between the international interbank-market and the banking system. This market is the basis of an efficient settlement of international payments and capital flows. It can be considered as one of the most important world financial markets both in a qualitative and in a quantitative sense. Therefore the interbank-market is one of the cornerstones of individual banks especially from an international point of view. Section 2 deals with an elaboration and explanation of the characteristics of the interbank-market. In section 3 the analysis refers to a simple model concerning the stability of the international banking system in the short run. This model postulates a structure of the balance-sheet of the banks which on the average may be considered as representative for the seventies. For in that decade many banks were financing non-liquid assets with short-term interbank-deposits. From a liquidity point of view this implies a weak financial structure and a great dependence on the interbank-market. In these circumstances banking problems may have spill-over effects to the interbank-market and vice versa. However in the long run the stability of the banking system and of the interbank-market is determined particularly by the solvency of the banks concerned. In section 4 the determinants of this solvency will be analysed.