The interbank payment network and financial system stability

Purpose: The financial turbulence resulting from the global financial crisis sparked the interest in improving understanding of financial risks. The transmission of financial institution failures can be determined from the prevailing network structures between banks. The purpose of this study is to identify relationship between payment system network characteristics and financial system condition. Design/methodology/approach: The characteristics of the interbank network structure in the payment system are identified using a graph theory and the relationship between the network characteristics of interbank transactions in the payment system and financial system stability is examined using a vector auto regression model. Findings: This study shows that the connectedness of large-value payment transaction is more segmented compared to that of retail value payments. A significant relationship is observed between the characteristics of the network and the large-value payment transactions. Research limitations/implications: This study found the connectedness of large-value transactions is more segmented when compared to retail-value transactions. It also shows a causal effect of the network characteristic on the financial system stability. Originality/value: Unlike existing studies, this study considers both the connectedness in large-value transactions and retail-value transactions.