Static and Dynamic Networks in Interbank Markets

Ethan Cohen-Cole, Eleonora Patacchini and Yves Zenou
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Ethan Cohen-Cole: Econ One Research

No 1408, EIEF Working Papers Series from Einaudi Institute for Economics and Finance (EIEF)

Abstract: This paper proposes a model of network interactions in the interbank market. Our innovation is to model systemic risk in the interbank network as the propagation of incentives or strategic behavior rather than the propagation of losses after default. Transmission in our model is not based on default. Instead, we explain bank profitability based on competition incentives and the outcome of a strategic game. As competitors’ lending decisions change, banks adjust their own decisions as a result: generating a ‘transmission’ of shocks through the system. We provide a unique equilibrium characterization of a static model, and embed this model into a full dynamic model of network formation. We also determine the key bank, which is the bank that is crucial for the stability of the financial network.

Pages: 38 pages
Date: 2014, Revised 2014-09
New Economics Papers: this item is included in nep-ban, nep-com, nep-gth, nep-net and nep-reg
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Static and dynamic networks in interbank markets (2015)
Working Paper: Static and dynamic networks in interbank markets (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eie:wpaper:1408

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