Contagion and risk-sharing on the inter-bank market

Daniel Ladley ()

Journal of Economic Dynamics and Control, 2013, vol. 37, issue 7, 1384-1400

Abstract: Increasing inter-bank lending has an ambiguous impact on financial stability. Using a computational model with endogenous bank behavior and interest rates we identify the conditions under which inter-bank lending promotes stability through risk sharing or provides a channel through which failures may spread. In response to large economy-wide shocks, more inter-bank lending relationships worsen systemic events. For smaller shocks the opposite effect is observed. As such no inter-bank market structure maximizes stability under all conditions. In contrast, deposit insurance costs are always reduced under greater numbers of inter-bank lending relationships. A range of regulations are considered to increase system stability.

Keywords: Systemic risk; Inter-bank lending; Contagion; Regulation; Network (search for similar items in EconPapers)
JEL-codes: C63 G21 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (72)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:37:y:2013:i:7:p:1384-1400

DOI: 10.1016/j.jedc.2013.03.009

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