Empirical research on borrowing and lending in interbank markets finds two regularities. First, the interactions between banks are bilateral and repeated. Second, only a few large banks access the markets for liquidity, while smaller banks tend to deal with the larger ones. These findings suggest that banks form networks with a tier, core-periphery structure. We formulate a model where two forces drive the emergence of such networks. On the one hand, decreasing monitoring costs encourage the formation of bilateral relationships in a dynamic framework. On the other hand, additional benefits acquired from intermediating transactions between others can explain the tier structure of the banking system.