Bank networks: Contagion, systemic risk and prudential policy

Arbeitspapier

We present a network model of the interbank market in which optimizing risk averse banks lend to each other and invest in non-liquid assets. Market clearing takes place through a tâtonnement process which yields the equilibrium price, while traded quantities are determined by means of a matching algorithm. Contagion occurs through liquidity hoarding, interbank interlinkages and fire sale externalities. The resulting network configuration exhibits a coreperiphery structure, dis-assortative behavior and low density. Within this framework we analyze the effects of prudential policies on the stability/efficiency trade-off. Liquidity requirements unequivocally decrease systemic risk but at the cost of lower efficiency (measured by aggregate investment in non-liquid assets). Equity requirements tend to reduce risk (hence increase stability) without reducing significantly overall investment.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SAFE Working Paper ; No. 87

Classification and Topics

• Classification: Wirtschaft ; Network Formation and Analysis: Theory ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Financial Institutions and Services: Government Policy and Regulation ; Computational Techniques; Simulation Modeling ; Transactional Relationships; Contracts and Reputation; Networks
• Subject: banking networks ; systemic risk ; contagion ; fire sales ; prudential regulation

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Aldasoro, Iñaki ; Delli Gatti, Domenico ; Faia, Ester
• Event: Veröffentlichung
• (who): Goethe University Frankfurt, SAFE - Sustainable Architecture for Finance in Europe
• (where): Frankfurt a. M.
• (when): 2015

Further information

• DOI: doi:10.2139/ssrn.2572877
• Handle: http://hdl.handle.net/10419/203292
• Last update: 10.03.2025, 11:41 AM CET