Work

The biggest bank may not be the most interconnected: A refined entropy-based approach for indicating the direction of interbank flow

Year: 2025

Type: article

Abstract: The maximum entropy is widely used to estimate the liquidity exposure in the interbank system. However, this method tends to overemphasize the "too-big-to-fail" issue. It could mislead policymakers into over-regulating big banks. This paper proposes the Directed MaxEnt Method to measure the direction of interbank flow by integrating information from interbank deposit and interbank-offered credit. Using data from China's interbank system, we analyze the interbank data of 85 banks from 2018Q1 to 2023Q3 covering the onset of COVID-19. Our findings indicate that the largest bank in China is not the most connected entity within the network. Instead, semi-large banks emerge as pivotal hubs facilitating interbank transactions during the harsh time. Our research provides a new method for examining the short-term dynamics of interbank networks and figures out insights into the liquidity transmission of the interbank system.

Source: International Review of Economics & Finance

DOI: 10.1016/j.iref.2025.104217

Authors: Tongyu Wang, Haijun Yang, Jiaxing Weng, Luqing Guo

Institutions: Ocean University of China, Beihang University, China University of Geosciences

Language: English

Topic: Banking stability, regulation, efficiency

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: gold

Estimated APC paid: $1,930

Funders: Chongqing Social Science Planning Fund, Social Science Planning Project of Shandong Province