The Link Between Incomplete Information on the Interbank Network and Counterparty Risk

Artikel

This paper describes a model in which a network of interbank loans leads to a severe amplification of the previously unanticipated insolvency of one bank. Banks that cannot rule out an indirect hit react by selling assets and hoarding liquidity. While this potentially lowers illiquidity risks, it depresses market liquidity and prices. This leads to a negative externality by which sales to acquire liquidity simultaneously lead to lower global sale proceeds and thus to a greater number of insolvencies inducing deadweight losses. Thus, the distribution of information on the network has a direct impact on welfare by itself.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Journal: Credit and Capital Markets – Kredit und Kapital ; ISSN: 2199-1235 ; Volume: 52 ; Year: 2019 ; Issue: 2 ; Pages: 213-227

Classification and Topics

• Classification: Wirtschaft ; Financial Crises ; Portfolio Choice; Investment Decisions ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Bankruptcy; Liquidation
• Subject: Banks ; Cash-in-the-Market Pricing ; Counterparty risk ; Incomplete information ; Liquidity

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Förster, Daniel ; Walther, Martin
• Event: Veröffentlichung
• (who): Duncker & Humblot
• (where): Berlin
• (when): 2019

Further information

• DOI: doi:10.3790/ccm.52.2.213
• Last update: 10.03.2025, 11:42 AM CET