Interbank networks may be too decentralised – BoE paper

Interbank networks may become too decentralised if they are allowed to grow without regulatory intervention, according to a Bank of England working paper.

Patrick Coen and Jamie Coen build a network model where interbank links develop endogenously. Banks choose which links to build up on the basis of default risk.

But the authors find this does not lead to the socially optimal outcome. A “social planner” could generate bigger surpluses for banks or cut risk without decreasing surpluses, they