This theoretical model analyzes the impact of interbank credit market dy-
namics on systemic risk in the economy. Starting with a single bank’s balance
sheet, which includes interbank activities, we derive general portfolio equilib-
ria in nancial markets. Based on these static equilibria, a stochastic model
of interbank market dynamics is introduced, which can identify a dynamic in-
stability. We de…ne nancial market resilience as the probability of a stable
adjustment process to portfolio equilibrium. A change in the volatility of re-
serve ‡ows, which we often observe when central banks tighten monetary policy,
may threaten the resilience of interbank markets and increase the probability
of the market to fall into a regime of unstable dynamics. Thus, we stress that
monetary policy could incidentally reduce nancial stability, especially under a
monetary policy regime-switch from an expansionary to a contractionary policy.
When switching the regime, policymakers should be aware of a potential reduc-
tion in interbank credit market resilience and the consequences for nancial
stability.