Date of Award

Fall 2012

Degree Type

Thesis

Degree Name

Doctor of Philosophy (PhD)

Department

Computational Engineering and Science

Supervisor

Matheus R. Grasselli

Language

English

Abstract

The aim of this thesis is to study the role of banking in society and the effect of the

interbank market on the performance of the banking system.

It starts by reviewing

several studies conducted on empirical banking networks and highlighting their salient

features in the context of modern network theory. A simulated network resembling the

characteristics documented in the empirical studies is then built and its resilience is

analyzed with a particular emphasis in documenting the crucial role played by highly

interconnected banks.

It is our belief that the study of systemic risk and contagion in a banking system

is an integral part to the study of the economic role of banks themselves. Thus the

current work focuses on the fundamentals of banking and aims at identifying the

necessary drivers for a dynamical setup of the interbank market.

Through an agent–based model, we address the issues of bank formation, bank runs

and the emergence of an interbank market. Starting with heterogeneous individuals,

bank formation is viewed as an emergent phenomenon arising to meet the needs for

investment opportunities in face of uncertain liquidity preferences. When banks work

in isolation (no interbank market), in the long run and through a long experience with

bank failures, banking turns into a monopoly or a market with few players.

By equipping banks with their own learning tools and allowing an interbank market

to develop, fewer bank failures and a less concentrated banking system are witnessed.

In addition, through a scenario analysis, it is demonstrated that allowing banks to

interact does not weaken the banking system in almost all the cases, and improves

the performance on multiple occasions.

The work is concluded by studying the effects of a banking system on individuals

and the economy in what is called social measures. We establish that the effects

of banking on social measures such as consumption level, consumption inequality

between individuals, long term investment and economic waste, varies significantly

based on the structure of the society.

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