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Interbank
The interbank payment network payment
and financial system stability network
Imaduddin Sahabat, Tumpak Silalahi and Ratih Indrastuti
Bank Indonesia, Jakarta, Indonesia, and
Marizsa Herlina
Universitas Islam Bandung, Bandung, Indonesia Received 9 October 2018
Revised 12 December 2018
Accepted 14 December 2018

Abstract
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.
Keywords Network structure, Financial system stability, Interbank payments,
Large-value payment, Retail payment, Global finance crisis
Paper type Research paper

1. Introduction
The 2008 global finance crisis (GFC) caused economic turmoil in most countries in the world.
The fiscal cost of government intervention (such as recapitalization and asset purchases)
following the GFC (in 2009) reached 5 per cent of GDP on an average in the European Union
and more than 40 per cent of GDP in Iceland and Ireland (Amaglobeli et al., 2015). This type
of cost warned policymakers that there is a need to improve our understanding of financial
risks.
The instability in the financial system was a consequence of the systemic chain effect of
the failure of one financial institution on other financial institutions. In other words, the
financial system[1] is a strong bank-transfer network (May et al., 2008). According to Boss
et al. (2004), during an economic turmoil, the transmission of financial institution failures
could be determined based on the structure of the financial market network between banks
(or interbank networks). Further, the systemic risk (the risk of whole system collapse) can be
Studies in Economics and Finance
© Emerald Publishing Limited
1086-7376
JEL classification – A12, C45, C55, D85, L14 DOI 10.1108/SEF-10-2018-0310
SEF quantified using interbank networks (Squartini, et al., 2013). While network structures have
the potential of becoming a source of risk transmission experienced by banks within the
financial system, they may also act as a shock absorber such as in the case of a liquidity
shock condition (Scott, 2016). Moreover, changes in the network structure within the
financial system can be a sign of potential distress (Squartini, et al., 2013). The important
role played by the network structure has prompted research related to the structure of the
financial market network between banks to understand more about the phenomenon of
financial system condition.
Several studies have evaluated the relationship between the network structure and the
financial system stability. Theoretical studies conducted by Allen and Gale (2000) and
Freixas (2000) show that a bank has minimum risk in the event of a shock if the bank is
connected to many other banks. Empirical studies, such as Soramäki et al. (2006), Becher
et al. (2008), Schmitz and Puhr (2009), Craig and von Peter (2014), van der Leij et al. (2016)
and Baek et al. (2014), commonly reach the conclusion that network structures and the
financial system are significantly linked.
The present study explores the characteristics of network structures and their
relationship with the financial system stability by using various types of transactions of a
large-value payment system. Large-value payment system handles very large amounts of
payments, mainly exchanged between banks or participants in the financial markets, and
these usually require real-time settlement (BIS, 1997, 2003; CPSS, 2005b). Based on volume
of transactions, there are two types of payment and settlement systems that are conducted
by central banks, namely, large-value and retail payment systems (CPSS, 2005a). Retail
payment system is the fund transfer system that handles large volumes of low-value
transactions in the form of cheques, credit transfers, direct debits and card payment
transactions (BIS, 2003).
Transactions of large-value payment system data are used by several empirical studies
to observe the characteristics and models of the network structure. However, only a few
studies focus on the relationship between a network and stability of financial system with
various types of payment transactions (CPSS, 2005a). This study aims to analyze and
identify the characteristics of interbank connectedness in the payment system and examine
the relationship between network characteristics and financial system stability. In addition,
unlike previous studies, namely, Soramäki et al. (2006), Becher et al. (2008), Schmitz and
Puhr (2009), Craig and von Peter (2014), van der Leij et al. (2016), and Baek et al. (2014), the
present study looks at both the connectedness pattern that occurs in large-value payment
transaction and at retail payments.
The network structures that link the actors within the payment system in the present
study are analyzed by means of a graph theory approach. Furthermore, the determination of
network characteristics causality with the financial system condition in this research is
analyzed using time-series data. To foreshadow some of the key findings, this study shows
that the connectedness of large-value payment transaction is more segmented compared to
that of the retail value payment. In addition, a significant relationship is observed between
the characteristics of the network and the large-value payment transactions.
The rest of the study is organized as follows. Section II describes the network theory
suited for analyzing interbank connectedness in the payment system. This follows a
discussion of the research methodology with reference to the concept of network theory and
econometric model (Section III). Section IV describes the findings relating to the
connectedness characteristics based on an event analysis. This section also explains the
variables in the network that have a relationship with the economic conditions. Finally,
Section V provides the concluding remarks.
2. Theory Interbank
2.1 Conceptual framework payment
According to Easly and Kleinberg (2010), to analyze a network, it is necessary to:
network

distinguish between the central or peripheral components;

identify whether the number of interpersonal connections is frequent (solid) or rare;

understand how the roles of each group are formed in the network; and

understand whether there are consequences for participants in the network if there
is a change in behavior of the main player.

Hence, critical to the network analysis is the categorization of the interconnections that
occur between individuals.
Over the past decade, the interest on the phenomenon of bank interconnection has been
growing. The application of network theory in the field of economics is often used to
describe the relationships among economic agents. One such example is the interagency
interactions on the labor market. The interconnectedness allows the exchange of
information between employers and labor (Granovetter, 1995; Montgomery, 1991) and
economic agents on the market structures (Bénabou, 1996; Corominas-Bosch, 2004).
In the financial system context, the study of the network theory is often used to examine
the contagion or systemic risk that could happen among financial institutions. In this
context, Bhattacharya and Thakor (2002) argue that liquidity in the financial system came
from the banks’ role in manipulating and matching different short-term liabilities and asset
maturities. Banks, as the liquidity providers, obtained funds from the public and took it to
the lending market (Kashyap et al., 2002). The maturity mismatch of interbank payment
could cause short-term interbank borrowing in the lending market. If these events continue
to roll, it would cause liquidity shortage especially for systemically important banks. At the
end of the day, this contagion effect would lead to a financial shock (Acharya, 2011).
In the analysis of the network theory, the characteristics of a network can be seen through
two approaches, namely, the Giant Weakly Connected Components (GWCC) and the Core-
Periphery Model (CPM). The GWCC approach can be used to determine the disintegration of
the network in the event of pressure. Hence, it can show the interconnected structural
differences between banks before and after a particular shock by measuring the distance of
connectedness at different time periods. However, the disadvantage of the GWCC approach is
that it has not been generalized to the network as a whole. Moreover, the CPM approach to
network science can be implemented to determine relationships in the financial network. The
model can determine the structure of connectedness by classifying a group of banks acting as
core/center or periphery. The model has its limitations in that it cannot be used as a monitoring
tool to identify potential future crises in the financial system. Therefore, this study aims to link
the network characteristics of interbank payments identified using the graph theory approach
of Squartini et al. (2013) to the financial system using a vector auto regression (VAR) model.

2.2 Literature review

The interbank network structures have been examined in relation to developing systemic risk
theory with respect to the interbank financial market (Bhattacharya and Gale, 1987) or spread
risks within the interbank financial market structure (Freixas et al., 2000; Allen and Gale, 2000).
Allen and Gale (2000) find that a bank has minimum risk in the event of a shock if the bank is
connected to many other banks. Boss et al. (2004), one of the first studies to explore the
implementation of network topology on interbank financial markets, find that the interbank
network depicts a community structure that exactly mirrors the regional and sectoral
SEF organization of the actual Austrian banking system. Several studies describe network
characteristics using the GWCC approach (Soramäki et al. (2006), Becher et al. (2008), and
Schmitz and Puhr (2009)). Using the real-time gross settlement (RTGS) data for the USA,
Soramaki et al. (2006) suggest that national crises may lead to changes in the payment system
network topology as evidenced by reduced points, links and connectivity[2]. The network
analysis using GWCC approach is also adopted to examine network characteristics using
RTGS data for the UK (Becher, et al., 2008) and Austria (Schmitz and Puhr, 2009) to determine
the impact of operational shock on the network characteristics in the payment system.
Furthermore, banking network models were developed by Craig and von Peter (2014),
van der Leij et al. (2016), and Baek et al. (2014). Using interbank market data in Germany,
Craig and von Peter (2014) find the structure of interbank markets to be tiered. The market
networks are centered around core banks that are intermediate among smaller banks in the
periphery. Similarly, Baek et al. (2014) calculate Korean interbank network and conclude
that the CPM structure fits the data relatively well. This result was also captured by van der
Leij et al. (2016) in the overnight interbank lending market of The Netherlands, where
periphery banks prefer to trade indirectly via intermediating core banks.
The study of network and its relation to financial system stability is still relatively
limited. Allen and Gale (2000) link interbank financial markets with the impact of contagion
effects in the financial system. Moreover, Squartini et al. (2013) analyze the systemic risk
potential on the financial system through changes of network.
The present study follows Squartini et al. (2013) to analyze the network characteristic of
interbank payment. However, unlike Squartini et al. (2013), we explain the economic reasoning
from the observed changes in the network using the Financial Stability Index (FSI)[3]. Therefore,
this research examines the impact of the network characteristics on the financial system.

3. Methodology
The characteristics of the interbank network structure in a payment system are identified
using a graph theory. However, the relationship between the network characteristics of
interbank transactions in the payment system and financial system stability is examined
using a VAR model. Furthermore, event analysis is performed on the variables generated
from the network modeling.

3.1 Network analysis

Following Squartini et al. (2013), we use the graph theory to capture the characteristics of the
interbank network in terms of seven variables: Average Degree (AD), Average Weighted
Degree (AWD), Network Diameter (DIA), Graph Density (DENS), Modularity (MOD),
Connected Components Weak (CCW) and Connected Components Strong (CCS) (Jackson,
2008; Barabási, 2016).

AD: This represents the average frequency of one bank transfer to another bank
over a period of time and is obtained as follows (Barabási, 2016):

1X N
1X N
L
i ¼
kin i ¼ ki
kin ¼ kout ¼
out
(1)
N i¼1 N i¼1 i N

where N is the total banks, L is the set of links, kin i is the incoming degree or
incoming transfer (link) of bank i within the network, and kout
i is the outgoing degree
or outgoing transfer to bank i. The total degree owned by a single node is as follows:
 ki ¼ kin
i þ ki
out
(2) Interbank
If the equation is represented by a matrix adjacency, Aij, the size of which is N x N, where Aij = payment
1 if there is a link from bank j to bank i, and Aij = 0 if there is no link between bank i and j, then network
the equation will be as follows:

X
N X
N

i ¼
kin Aij kout
i ¼ Aji (3)
i¼1 i¼1

where Aij = Aji and

X
N
L¼ Aij
i;j¼1

AWD: The AWD is the average nominal value of interbank transfer over a period,
calculated by creating an adjacency matrix that becomes:

Aij ¼ wij (4)

where wij represents the total nominal transfer value between bank i and bank j (outgoing
and incoming) and Aij = 1 if there is a link from bank j to bank i, and Aij = 0 if there is no link
between bank i and j (Barabási, 2016).

DIA: This is the distance of interbank transfer line (minimum of 1). It was denoted
by dmax, i.e. the maximum value from the short path in the network. The number of
short path, Nij, and the distance, dij, between bank i and j can be directly calculated
from the matrix Aij

where:
dij = 1 if there is a direct relation between bank i and j, then Aij = 1; and
dij = d if there is a path along d between bank i and j, then Aik. . .Aij = 1 .
ð Þ
Then, the total path from the distance d between bank i and bank j is Nijd ¼ Adij (Barabási,
2016).

DENS: This is the number of interbank relationships divided by the total number of
interbank relationships that can occur within the network. DENS falls in the 0-1
range, where approaching 1 means the network gets denser. The density variable
from the network can be calculated as follows (Barabási, 2016):
jLj
Density ¼ (5)
jNjðjNj  1Þ

MOD: Modularity measures bank groupings formed within a network and is
determined as follows:

k 
X 
Modularity ¼ eii  a2i (6)
i¼1

where eii is the percentage of link in modular i and ai represents the percentage of link with
at least one link ending in modular i.
SEF
CCW: This is the number of subgraphs that have links between their member banks
(undirected relationship).

CCS: It represents the number of subgraphs that have links between their member
banks, but it the relation counted is directed subgraph.

These seven variables represent the characteristic of interbank network that may affect the
financial system. Next, a VAR model will be estimated to determine the characteristics that
have a significant impact on the financial system.

3.2 The relationship between network characteristics and financial system

The relationship between interbank transactions in the payment system and the financial
system stability is examined through a VAR analysis. In effect, the network variables
described in the previous section will be linked with the FSI as a proxy for the financial
system. If all variables (yt) used in the model are stationary (I (0)), the Detrended Cross
Correlation or VAR analysis will be used; however, in case some variables are non-
stationary (I(1)), the Johansen procedure will be used. The model to be estimated is as
follows:

zt ¼ B1 zt1 þ B2 zt2 þ . . . þ Bk ztk þ ut ; ! ut IN ð0; RÞ (7)

where zt refers to vector variables that used in VAR model and Bi represents the matrix
parameter.

3.3 Data
The data used in this study are monthly interbank transactions data over the period of 2005-
2016 from 142 banks, categorized based on their asset holdings into BUKU[4] 1, 2, 3 and 4.
The data on large-value payment transactions and retail (small) transactions are sourced
from the payment system managed by Bank Indonesia. This data consists of:

interbank Money Market (PUAB[5]) transactions in Rupiah;

transactions of interbank foreign exchange sales from Rupiah side;

interbank exposures, i.e. the sum of the interbank money transaction and settlement
of buying and selling foreign exchange transactions;

the retail transaction is a sum of credit clearing (transfer of funds) and debit
clearing; and

FSI from Bank Indonesia.

4. Results and analysis

4.1 Network characteristics analysis
The seven variables of network characteristic developed using the large-value transaction
and retail data managed by Bank Indonesia over the period 2005-2016 are presented in
Table I. Their evolution over the study period is depicted in Figures 1-5.
The network characteristics, explained in Section 3, can be seen as depicting
concentration (AD, AWD, DENS), distance (DIA) and segmentation (MOD, CCW and CCS).
We notice that there were some decline in characteristics variables when GFC occurred.
Generally, when shock happened, there is less payment network degree than the normal
condition. This pattern is clearly visible in the plots shown in Figure 1.
 The AD of relationships of one bank with another bank over the period of 2005-2016 Interbank
varied depending on the types of transactions (Table I). The retail transaction is found to payment
have the largest average compared to other transactions. The transfer from one bank to
another bank, which defines retail transaction, is initiated by bank customers; therefore, the
network
banks are related to each other not by their own choice but through the economic activities
of the customers. Furthermore, in the large-value transactions (PUAB, Forex and Interbank
Exposure), the transfer of transactions from one bank to another is driven by the need to
meet the daily liquidity requirement of the bank; therefore, the transfer relationship is
generally selective.
The average number of interbank transactions on the PUAB and the interbank exposure
declined throughout June 2008, deepening further during the period September-December
2008 and marks the height of the GFC. The declining pattern is not visible in retail and forex
transactions (see Figure 1).
Furthermore, the exposure of interbank transactions had the largest AWD compared to
the other transactions. Transactions relating to interbank exposure occur based on the need
to meet the adequacy of operational liquidity of each bank (Table I). The AWD of interbank
transactions, interbank exposure, and retail experienced significant decline in the second
half of 2008 (Figure 1(b)). The value of transactions in the PUAB fell from Rp1.9tn in March
2008 to Rp64bn in November 2008. Subsequently, the value of interbank transactions
decreased significantly from Rp2.08tn in March 2008 to Rp1.05tn in December 2008.
However, the value of retail transactions decreased from Rp994bn in August 2008 to
Rp39.1bn in September 2008. In contrast, the AD of interbank retail transfer was unaffected
by the GFC.
The concentration of interbank transactions is captured by the variable DENS in
Figure 1(c). The retail transaction has the highest average density compared to other
transactions, consistent with AD.
Based on the analysis of concentration category (AD, AWD, and DENS), it can be
concluded that the network structure of retail transactions is more concentrated than that of
the other payment transactions. However, when viewed from the transaction value point of
view, the network structure in the interbank transactions is more concentrated.
Note that the average network diameter on the PUAB transactions has increased since
the second half of 2015 (Figure 1(d)). This can be attributed to the upgraded version of the
RTGS and retail systems in Indonesia. However, based on the network distance category, it
can be concluded that the interbank distance in the retail transaction is the shortest
compared to other transactions over the period of 2005-2016. This is because interbank retail
transaction is done on the client’s order; hence, it is not selected by banks.

Interbank money Interbank

Network characteristics market (PUAB) Forex Retail exposure

Average degree (AD) 15 15 74 18

Average weighted degree (AWD) in billion Rp1,512.4 Rp591.35 Rp1,239.85 Rp1,798.6
Network diameter (DIA) 6 4 3 5
Graph density (DENS) 0.13 0.24 0.54 0.15
Modularity (MOD) 0.36 0.25 0.01 0.32
Connected components weak (CCW) 1 1 1 1
Connected components strong (CCS) 9 8 2 7 Table I.
Network character
Source: HARTIS data variable comparison
SEF

Figure 1.
Plots of the data
 Interbank
payment
network

Figure 2.
Impulse response of
FSI
SEF

Figure 3.
Impulse response of
FSI
 Interbank
payment
network

Figure 4.
Impulse response of
FSI
SEF

Figure 5.
Impulse response of
FSI
The segmentation of the banks is depicted by the MOD variable in Figure (e). A higher Interbank
modularity value indicates occurrence of more groupings (or higher segmentation) within payment
the network. The interbank relationship expressed in terms of PUAB transactions is more
segmented than other transactions because the banks that act as a source of funds on the
network
PUAB generally select partner banks. Moreover, for retail transactions, the interbank
relationship is not exclusive because there are several banks that become liaison banks (i.e.
between the bank groups). The results from the segmentation category are in line with the
characteristics of CCS variable as shown in Table I. In a large payment transaction network,
there are about seven to nine link banks. Furthermore, in retail transactions, there are only
two CCS, indicating that the network in the transaction is not segmented.

4.2 A vector auto regression model analysis

Some preliminary tests are conducted before proceeding to the VAR analysis. We begin by
testing the time-series properties of variables using the conventional augmented Dickey and
Fuller (1981, ADF) and Phillips and Perron (1988) tests, which examine the null hypothesis
that the series has a unit root. The reported statistics in Table II indicate the rejection of the
null almost all the time for all the variables (except CCS) in the level form. Variables that
characterize interbank networks (forex and retail transactions) are both stationary at levels.
This is also true for other connectedness variables for transactions relating to PUAB and
interbank exposure; the exception is the CCS variable.
Because the CCS variable in the case of the PUAB and interbank exposure is not
stationary at the level form, the VAR models relating to PUAB transaction model and
interbank exposure are estimated without the CCS variable.
Next, the number of lags is determined based on the Akaike information criterion (AIC),
Schwarz information criterion (SC) and Hannan–Quinn information criterion (HQ). The
following VAR (1) model is found to be most appropriate:

zt ¼ B1 zt1 þ ut ; ! ut IN ð0; RÞ (9)

Here, zt refers to vector variables that used in VAR and Bi represents the matrix parameter.

Interbank money market (PUAB) Forex Interbank exposure Retail

Variables ADF PP ADF PP ADF PP ADF PP

AD 0.083* 0.1501 0.0203* 0.0079*** 0.0119** 0.0235** 0.0041*** 0.0000***

AWD 0.0000*** 0.0000*** 0.1631 0.0002*** 0.0000*** 0.0000*** 0.0000*** 0.0000***
DENS 0.0000*** 0.0219** 0.0005*** 0.0004*** 0.0001*** 0.0002*** 0.0714* 0.0000***
DIA 0.0198** 0.0000*** 0.0000*** 0.0000*** 0.0000*** 0.0000*** 0.4337 0.0000***
CCW 0.0000*** 0.0000*** 0.0000*** 0.0000*** 0.0000*** 0.0000*** 0.0000*** 0.0000***
CCS 0.8987 0.2453 0.0000*** 0.0000*** 0.6984 0.2642 0.0000*** 0.0000***
MOD 0.0007*** 0.0018*** 0.8541 0.0789* 0.0533* 0.0111** 0.0000*** 0.0007***
FSI 0.0353** 0.0364** 0.0355** 0.0364** 0.0533* 0.0364** 0.0355** 0.0364**

Notes: *significant at levels 10%; **significant at levels 5%; ***significant at levels 1%. This table
reports the augmented Dickey Fuller (ADF) and Phillips and Perron (PP) unit root test for each of the eight
variables used in estimating the VAR model under PUAB, forex, interbank exposure, and retail Table II.
transactions. The statistics report are significance at the levels 1, 5 or 10%, except CCS on the interbank ADF and PP unit
money market and interbank exposure root tests
SEF 4.3 Granger causality test
The Granger causality test is conducted to determine the interconnection relationship
(causility) between the network characteristics by different transaction type and FSI.
From Table III, it can be seen that the AD variable of interbank exposure
transaction is Granger-causing FSI. Furthermore, none of the network variables
relating to PUAB transactions, forex and retail Granger causes the FSI. These
findings suggest that early warning signals can be detected through transactions of
interbank exposures.

4.4 Impulse response function

Finally, we use impulse response function (IRFs) to explore the impact of shocks exerted by
the network characteristics by transaction type on the stability of the financial system or
FSI. In the event of a shock as big as one standard deviation (1s ) that occurs in the impulse
(network characteristics), the IFR indicates by when the FSI will return to normal/stable (at
line 0):

Interbank Money Market (PUAB) IRF.

We begin with 1s shock to network characteristics of PUAB transactions (Figure 2). It

seems that while the FSI stabilizes quickly aftershocks from factors displayed in (b)-(f), this
is not true in the case of the AD of PUAB transactions displayed in (a):

Forex IRF.

The FSI takes more than 40 months or 3 years and 4 months to stabilize after a 1s shock
exerted by the AD of forex, which indicates the average frequency of one bank transfer to
another bank (see Figure 3). The FSI response to a shock exerted by the AD and AWD of
forex transactions have a long-lasting effect with FSI stabilizing after 40 months. The other
shocks depicted in (c) - (f) are insignificant or short-lived:

Retail IRF.

In Figure 4, it can be seen that the FSI does not significantly change to shocks exerted by
network characteristics of retail transactions:

IRF of Interbank Exposure.

Dependent Variable: FSI

Interbank money market Forex Retail Interbank exposure
Variable Chi-sq Prob. Chi-sq Prob. Chi-sq Prob. Chi-sq Prob.

Average degree (AD) 1.19 0.28 0.13 0.71 0.29 0.60 3.98 0.04**
Average weight degree (AWD) 1.39 0.24 0.00 0.99 0.29 0.60 0.51 0.48
Graph density (DENS) 0.89 0.34 0.36 0.55 1.73 0.19 2.53 0.11
Diameter (DIA) 1.61 0.20 0.39 0.53 1.27 0.27 1.50 0.22
Modularity (MOD) 0.02 0.89 0.06 0.81 0.03 0.86 0.13 0.71
Connected component strong (CCS) – – 2.31 0.13 1.09 0.30 – –
Connected component weak (CCW) 0.21 0.64 – – – – 0.36 0.54

Notes: **significant at 5% levels. This table reports Granger causality tests of each of the seven network
Table III. characteristic variables on FSI. The Chi-sq and the p-values testing the null hypothesis of no Granger
Granger causality causality are reported. The statistics report that AD variable of interbank exposure transaction is Granger
test results causing FSI at the significant levels of 5%
In Figure 5, it appears that FSI responses to a shock exerted by the AD variable of interbank Interbank
exposure transactions. Its influence on the FSI is maximum over the 8 to 10 months period payment
and stabilizes after 37 months.
A significant relationship between the AD variable of interbank exposure transaction
network
and FSI is consistent with other studies, such as Squartini et al. (2013), which show that
network interbank structure and financial system stability are related. This finding
indicates that changes in the network structure within the financial system can be a sign of
potential distress.

5. Conclusion
This study examined the connectedness of banks on the interbank financial market network
structure in Indonesia by identifying the characteristics of the payment system network
structure based on concentration, distance and segmentation. The usefulness of the payment
system network characteristics as early warning signals of financial distress was also
examined within a VAR framework.
In terms of network intensity, large-value payment transactions are less frequent than
the densely packed network structure of retail payment transactions. In terms of network
distance, large-value payment transactions have a much wider distance compared to retail
transactions. This is because the frequency of links in retail transactions is more and
connects more banks compared to large-value transactions.
In terms of segmentation, large-value payment transactions are more segmented than
retail payment transactions. Judging from the modularity variable, the large-value payment
transactions have a high value of 0.36 in the interbank money market transactions, 0.25 in
forex transactions and 0.32 in interbank exposure transactions. Furthermore, the MOD
variable of retail payment transactions only reached 0.01. Note that the segmentation of
large-value transactional network structures is not exclusive because of the presence of
banks that liaise between these bank groups. Furthermore, the network structure in retail
payment is not so segmented. It is suspected that the segmentation of the network structure
is related to the level of liquidity risk in the financial system.
Based on the results from the VAR model, it can be concluded that AD variable –
measuring average frequency of one bank transfer to another bank of the interbank
exposure transactions – has a causal effect on the financial system stability. This result
indicates that the AD variable is able to capture changes in financial system condition that
can potentially be used as a variable that provides early warning signal of financial distress
in the financial system.

Notes
1. A financial system consists of institutional units and markets that interact typically in a complex
manner for the purpose of mobilizing funds for investment and providing facilities, including
payment systems, for the financing of commercial activities (IMF, 2006).
2. RTGS is for large-value funds transfer. A real-time (or continuous) settlement system is defined
as a system that can effect final settlement on a continuous basis during the processing day
(Bank for International Settlement, BIS, 1997).
3. The FSI is an index used in macroprudential surveillance to assess the financial systems
stability. In Indonesia, the FSI consists of the composit index such as the financial institution and
financial market (Gunadi et al., 2013).
4. Commercial Banks Business Activities are known as BUKU. BUKU 1 (banks with core capital of
less than Rp1 tn), BUKU 2 (banks with core capital of at least Rp 1 tn up to less than Rp5 tn),
SEF BUKU 3 (banks with core capital of at least Rp5 tn up to less than Rp30 tn), and BUKU 4 (banks
with core capital of at least Rp30 tn).
5. The interbank money market in Indonesia is known as Pasar Uang Antar Bank (PUAB).

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Further reading
Shields, R. (2012), “Cultural topology: the seven bridges of königsburg 1736”, Theory, Culture and
Society, Vol. 29, pp. 43-57.

Corresponding author
Tumpak Silalahi can be contacted at: silalahi@bi.go.id

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