Monetary and Economic Studies Vol.28 / November 2010

The Transaction Network in Japan's Interbank Money Markets

Kei Imakubo, Yutaka Soejima

Interbank payment and settlement flows have changed substantially in the last decade. This paper applies social network analysis to settlement data from the Bank of Japan Financial Network System (BOJ-NET) to examine the structure of transactions in the interbank money market. We find that interbank payment flows have changed from a star-shaped network with money brokers mediating at the hub to a decentralized network with numerous other channels. We note that this decentralized network includes a core network composed of several financial subsectors, in which these core nodes serve as hubs for nodes in the peripheral sub-networks. This structure connects all nodes in the network within two to three steps of links. The network has a variegated structure, with some clusters of institutions on the periphery, and some institutions having strong links with the core and others having weak links. The structure of the network is a critical determinant of systemic risk, because the mechanism in which liquidity shocks are propagated to the entire interbank market, or likewise absorbed in the process of propagation, depends greatly on network topology. Shock simulation examines the propagation process using the settlement data.

Keywords: Interbank market; Real-time gross settlement; Network; Small world; Core and periphery; Systemic risk

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2010 Bank of Japan All Rights Reserved.

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