Stability of the Interbank Money Market in Times of Downturn and Trust Crisis : The Intervening Role of Blockchain

Considering uncertainty in banks’ liquidity needs as a proxy of trust in the interbank market, this paper proposes a blockchain consensus algorithm to build trust among the market players and uses an agent-based model to investigate the effects on market stability. We connect 413 heterogeneous banks in France that share liquidity through unsecured overnight loans and follow a standard set of interbank rules under Basel III. For three different economic scenarios (growth, decline, and recession), represented by three different levels of uncertainty, we study the impacts of off-chain and on-chain strategies on the banks’ failures and the banking system’s stability. This study shows that the use of blockchain to restore trust in the market helps to increase financial stability by delaying the cascade of failures. This delay would be a golden opportunity for the regulator to adopt new policies and save the market