MULTI-CHANNEL CONTAGION IN DYNAMIC INTERBANK MARKET NETWORK

Tao Xu, Jianmin He and Shouwei Li
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Tao Xu: School of Economics and Management, Southeast University, Nanjing, Jiangsu Province, P. R. China
Jianmin He: School of Economics and Management, Southeast University, Nanjing, Jiangsu Province, P. R. China
Shouwei Li: School of Economics and Management, Southeast University, Nanjing, Jiangsu Province, P. R. China

Advances in Complex Systems (ACS), 2016, vol. 19, issue 06n07, 1-25

Abstract: In this paper, a dynamic interbank market network model based on bank agent behaviors is developed to analyze financial contagion with counter-party and liquidity channels. Afterwards, we analyze the impact of dynamics on the stability of interbank market and find that dynamics of interbank market could enhance the resilience of the network, which suggests contagion might be overestimated in current studies. Moreover, we investigate the mechanism of contagion when counter-party and liquidity channels are both active in the dynamic interbank market network. Specifically, we analyze the effects of bank capitalization, interbank exposures, liquid assets, and bank credit lending preference on the stability of the banking system, respectively. First, we find that liquidity in interbank market and fluctuations of deposits could amplify the negative impact of each other on the resilience of interbank market network. Second, banks with higher capitalization level tend to be more resilient against financial contagion. Third, interbank exposures may have multiple effects on the resilience of interbank market network. Fourth, the resilience of interbank market network is a nonmonotonic function of percentage of liquid assets. Finally, we discover a complex relationship between bank credit lending preference and the resilience of interbank market.

Keywords: Financial contagion; interbank market; dynamic network; multi-channel; bank behavior (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (3)

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DOI: 10.1142/S0219525916500119

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