Macroprudential consolidation policy in interbank networks

Can consolidation policy be made consistent with macro-prudential supervision? In this study, we seek to provide new insights on this key-question using a network approach. We study how the resilience of a banking network evolves as we shock an initially homogenous competitive market with a sequence of M&A activities that significantly alter the topology of the network. We study how different M&A treatments impact the structural vulnerabilities that can propagate through the system and we show that the severity of contagion and default dynamics depends on the chosen treatment. The desirability of alternative competitive settings (such as a hub-centered market or a more concentrated and yet symmetric market) are assessed against a homogenous benchmark case. We show that the choice depends crucially on the size of the interbank market and the level of bank capitalization. The existence of a large highly connected hub is beneficial in a capitalized network with a well-developed interbank ...