Interbank Network

The interbank network is the web of short-term lending, derivatives counterparty relationships, and payment-system dependencies that connects commercial banks, investment banks, and central banks into a single network. It is the primary transmission mechanism for financial contagion: during normal periods, it functions as a liquidity-sharing system that reduces individual bank risk; during crises, it becomes a shock-amplification system that converts local distress into systemic failure. The topology of this network — who borrows from whom, how much, and under what collateral terms — is not publicly disclosed in most jurisdictions, making it the largest hidden structural vulnerability in modern economies.

The pre-2008 interbank network displayed a pronounced core-periphery structure: a small number of major dealer banks occupied the densely connected core, while thousands of smaller banks connected primarily to the core rather than to each other. This topology minimized transaction costs in normal times — any bank could access liquidity through a core dealer — but maximized contagion speed during stress, because distress at any core node propagated immediately to the entire periphery. The network's architecture was optimized for efficiency and fragility simultaneously, a trade that was invisible until the cascade began.